Pedestrians walk past the Bank of Japan building in Tokyo, Japan March 18, 2024. REUTERS/Kim Kyung-Hoon

(Reuters) -The Bank of Japan kept interest rates steady on Thursday but repeated its pledge to continue increasing borrowing costs if the economy moves in line with its projections, prodding investors to bet on a hike as soon as December.

While the central bank roughly maintained its long-term forecasts, it elaborated on overseas risks that may hurt Japan's recovery in a sign of its focus on downside risks to growth.

As widely expected, the central bank maintained short-term interest rates at 0.5%. Board members Naoki Tamura and Hajime Takata dissented to the decision, repeating their proposals made in September to raise rates to 0.75%.

COMMENTS

NORIHIRO YAMAGUCHI, SENIOR JAPAN ECONOMIST, OXFORD ECONOMICS, TOKYO:

"The crucial question is whether Governor Ueda will indicate that the next rate hike is imminent at the press conference. If he assesses that the downside risks from tariff shocks have significantly receded, the market will likely price in an early rate hike. In that case, JGB yields are likely to rise and the yen will gain.

"I expect the BOJ to hike to 0.75% in December as incoming data confirm that the economy is performing in line with the central bank's forecasts. However, there's a material chance of a delay, depending on economic data and also if new Prime Minister Sanae Takaichi sticks to her cautious stance on monetary policy normalisation."

FRED NEUMANN, CHIEF ASIA ECONOMIST, HSBC, HONG KONG:

"The BOJ is tip-toeing towards a hike. With inflation remaining elevated, economic performance on a decent track, and fiscal tailwinds gathering speed, it remains a question of when, not if, the BOJ will hike. While markets have pushed back expectations for monetary tightening by Japan's central bank, officials may hike policy rates sooner rather than later.

HIROFUMI SUZUKI, CHIEF FX STRATEGIST, SMBC, TOKYO:

"Rather than reflecting political pressure, the decision seems to have been reached by the BOJ itself, based on its own assessment of economic conditions.

"With policy consistency confirmed vis‑à‑vis the Takaichi administration, the FX market is likely to see continued downward pressure on the yen.

"Assuming the BOJ continues to favour a gradual pace of rate increases, I expect an additional hike to be decided at the December policy meeting."

SHOKI OMORI, CHIEF DESK STRATEGIST, MIZUHO SECURITIES, TOKYO:

"The announcement reaffirms the authorities' commitment to a 'gradual normalization' of the policy stance and compels market participants to advance the timing they associate with the next policy adjustment.

"Between now and December, a number of key indicators will assume heightened significance. Foremost among these are the outcomes of the forthcoming Shunto wage negotiations, movements in service-sector prices, and developments in the external economy and trade policy.

"The authorities' message is clear: while an additional rate increase between December and the start of the next fiscal year has become a more concrete possibility, no immediate action is envisaged."

CHRISTOPHER WONG, CURRENCY STRATEGIST, OCBC, SINGAPORE:

"Market disappointment on the lack of a hawkish tilt saw yen bulls bail. Investors are awaiting the press conference for further details from Governor Ueda, but direction of BOJ policy normalisation is for hikes nonetheless.

"The Fed-BOJ policy divergence should help underpin the direction of travel for dollar/yen to the downside, although the slow pace of BOJ policy normalisation can frustrate dollar/yen bears."

TOHRU SASAKI, CHIEF STRATEGIST, FUKUOKA FINANCIAL GROUP AND FORMER BANK OF JAPAN OFFICIAL, TOKYO:

"Since Takaichi-san became the prime minister, I changed my forecast from a policy rate hike in October to next fiscal year, meaning April or later.

"The market is pricing in a 40-50% chance of a rate hike by the next meeting. Of course, it depends on Ueda-san's press conference, but probably this expectation is going to go lower.

"Lately, the dollar-yen rate is getting higher, trying to break the 153 level again. So if Ueda-san keeps the same tone as his last speech, I think dollar-yen will break higher, probably trying the 154-155 level."

KEISUKE TSURUTA, SENIOR FIXED INCOME STRATEGIST, MITSUBISHI UFJ MORGAN STANLEY SECURITIES, TOKYO:

"Two board members dissented to the decision. The market had been cautious that there would be three who would dissent so that eased the market concerns that the BOJ would turn hawkish."

CHARU CHANANA, CHIEF INVESTMENT STRATEGIST, SAXO, SINGAPORE:

"With the same two dissenters and a mild upgrade to this year's growth, the central bank is clearly staying cautious and it remains hard to argue for increased odds of a December rate hike. Unless Governor Ueda sounds meaningfully more hawkish at the presser, yen bears may get bolder ... especially with Treasury yields still elevated after Powell's remarks."

SIM MOH SIONG, CURRENCY STRATEGIST, BANK OF SINGAPORE, SINGAPORE:

"I think the yen is slightly on the back foot, also not helped by the fact that overnight, we had a hawkish surprise from the Fed, and there's a contrast here between a Bank of Japan that's still cautious in terms of rate hikes, and a Fed that's cautious in terms of rate cuts.

"We'll need to hear more from Ueda as to his thoughts, because there's still a possibility that the Bank of Japan may hike before the year-end. So I think that's still live, in terms of what they may do."

KRISHNA BHIMAVARAPU, APAC ECONOMIST, STATE STREET INVESTMENT MANAGEMENT, BENGALURU:

"We continue to see an increased likelihood of a rate hike within the next two policy meetings once global trade-related volatility is better assessed.

"Nonetheless, the central bank is still likely to move only gradually in the next year as well. That said, Japan remains constrained by a persistent policy trilemma ... balancing an independent monetary policy, stable governance, and credible fiscal stimulus proves challenging."

MASATO KOIKE, SENIOR ECONOMIST, SOMPO INSTITUTE PLUS, TOKYO:

"The fact that Takaichi was elected as prime minister is one significant factor that caused BOJ to skip rate hike this month. Given that she has yet to articulate a clear stance, I suspect the BOJ avoided rushing into an interest rate hike prematurely.

"Should the U.S. proceed with rate cuts, leading to a stronger yen and stabilising prices, the rationale for raising rates would diminish. It is highly like that the 25-basis-point hike in January next year would mark the end of the cycle. However, should the exchange rate swing significantly toward a weaker yen, a December hike remains a possibility."

KAZUTAKA MAEDA, ECONOMIST, MEIJI YASUDA RESEARCH INSTITUTE, TOKYO:

"Due to limited time for communications with Takaichi, it must have been difficult for the BOJ to make any policy changes this time.

"On the other hand, although Takaichi appears not in favour of a rate hike, she is not absolutely opposed to it either. If communications between the BOJ and Takaichi goes well, there remains a possibility of a rate hike in December.

"Recent comments from U.S. Treasury Secretary Bessent regarding the BOJ could also provide support for a rate hike."

MASAHIKO LOO, SENIOR FIXED INCOME STRATEGIST, STATE STREET GLOBAL ADVISORS, TOKYO:

"Domestic banks, sitting on roughly $3 trillion in cash at BOJ's current account, are expected to re-enter above 1.8%–2.0%, anchoring the topside of 10-year JGBs. While 2025 could remain a steepening story, there is potential for a flattening in 2026 as the BOJ hikes closer to the terminal rate and Japan's Ministry of Finance continues to tweak issuance composition to address technical supply-demand imbalances.

"Since October, foreign investors have rotated into Japanese equities on 'Takaichi trade', consistent with a shift up in Japan allocations.

"While some of the initial optimism may already be priced in, Japan's fundamental stability, ongoing corporate governance reforms, and improved earnings power continue to underpin a constructive medium-term outlook."

VASU MENON, MANAGING DIRECTOR, INVESTMENT STRATEGY, OCBC, SINGAPORE:

"It is also worth noting the BOJ also highlighted that economic risks are to the downside for the next fiscal year and highlighted the uncertainties about the global impact of trade policies.

"It is no surprise that the BOJ is not in hurry to raise rates significantly until it has greater confidence that the economy is on an even keel. The latest BOJ decision had no meaningful impact on the yen as the decision was anticipated.

"However, uncertainty about whether the Fed will cut rates in December after the latest FOMC may cap the yen's upside against the U.S. dollar in the short term."

(Reporting by Reuters Asia markets team; Editing by Sherry Jacob-Phillips)