The Bank of Japan maintained interest rates as scheduled, with two "hawkish" members voting against

According to the Zhitong Finance APP, the Bank of Japan maintained its benchmark interest rate at 0.5% on Thursday, a result that aligns with economists' expectations. The decision was passed by a vote of 7 to 2, with committee members Naoki Tamura and Hajime Takata proposing a 25 basis point increase. The market's reaction to this anticipated decision was relatively muted, with the yield on Japan's 10-year government bonds showing little change, the yen falling 0.2% to 153.03 yen per dollar, while the Nikkei index rose 0.4%.

Krishna Bhimavarapu, an economist at State Street Global Advisors in the Asia-Pacific region, stated in a report following the decision that the "likelihood of a rate hike increases" in the next two policy meetings when global trade-related fluctuations are better assessed. She added, "Nevertheless, the Bank of Japan may only take gradual actions next year."

Fred Neumann, HSBC's Chief Asian Economist based in Hong Kong, remarked: "The Bank of Japan is tiptoeing towards a rate hike. With inflation remaining high, the economy performing well, and fiscal benefits accelerating, a rate hike by the Bank of Japan is just a matter of time. Although the market has delayed expectations for the Bank of Japan to tighten monetary policy, officials may raise rates sooner rather than later."

This decision by the Bank of Japan comes as U.S. Treasury Secretary Janet Yellen met with Japan's new Finance Minister Satsuki Katayama on Monday, seemingly targeting the depreciation of the yen and even commenting on the country's monetary policy.

In a statement on Tuesday, the U.S. Treasury emphasized that Yellen "highlighted the important role of sound monetary policy formulation and communication in anchoring inflation expectations and preventing excessive exchange rate volatility."

Japan's inflation has recently been on the rise, with the pace of price increases remaining above the Bank of Japan's 2% target for 41 consecutive months. Yellen stated on social media on Wednesday, "Whether the government is willing to give the Bank of Japan policy space will be key to supporting inflation expectations."

Higher interest rates typically strengthen a currency by attracting foreign capital inflows, while lower rates weaken it. The weak yen has been a sticking point for former U.S. President Trump, who accused the Japanese government in March of devaluing the yen for unfair trade advantages. This week, Trump met with Satsuki Katayama, who has been an advocate for low interest rates and called past rate hikes by the Bank of Japan "foolish."

Although Satsuki Katayama seems to have softened her stance, this push for a stronger yen still conflicts with her plans for massive fiscal spending and loose monetary policy. Reports indicate that Satsuki Katayama stated on October 21, "The most important thing is for the Bank of Japan and the government to coordinate policies and communicate closely."

Satsuki Katayama is seen as a supporter of "Abenomics," the economic strategy of the late former Prime Minister Shinzo Abe, which advocates for loose monetary policy, fiscal spending, and structural reforms. Experts suggest that Satsuki Katayama's policies are likely to lead to yen depreciation, a situation that has already occurred in the so-called "Katayama trade," which has driven the Nikkei 225 index to record levels and the yen to fall below the 150 mark against the dollar In March, Yamamoto Yuki stated that the real value of the yen could be around 120-130 yen per dollar, which is about 26% higher than the current level of around 152.

The decision by the Bank of Japan was also made against the backdrop of relatively weak exports. Japanese exports have contracted for four consecutive months but rebounded in September, although exports to the United States are still declining.

Norihiro Yamaguchi, a senior Japanese economist at Oxford Economics in Tokyo, stated: "The key question is whether Governor Ueda will hint at an imminent rate hike at the upcoming press conference. I expect the Bank of Japan to raise rates to 0.75% in December; however, if the new Prime Minister, Kishida Fumio, insists on a cautious stance towards normalizing monetary policy, there is also the possibility of a delay."