Changes in the Japanese political situation are disrupting the central bank's decision-making, and it is expected to stay on hold this week, focusing on signals for October.

After Japanese Prime Minister Shizo Abe announced his intention to resign, the Bank of Japan faces new variables in its policy meeting this week, with markets generally expecting it to maintain the 0.5% benchmark interest rate. According to a survey of 50 economists, all predict that the two-day meeting ending on Friday will keep the interest rate unchanged, while insiders reveal that Bank of Japan officials are still assessing the impact of US tariffs on the domestic and foreign economy. This shifts market focus to the possibility of a rate hike in October - with over a third of respondents expecting a hike to 0.75%, or watching whether Bank of Japan Governor Haruhiko Kuroda rules out this option. Despite the Bank of Japan emphasizing its policy independence, political changes and the Federal Reserve rate decisions may still influence decision-making. Potential rate cuts in the US and fluctuations in the yen exchange rate are also being closely monitored, as a weakening US dollar could push up the yen, affecting the export-oriented economy. Bank of Japan officials believe that despite the political uncertainty, if economic data meets expectations, there is still a possibility of a rate hike before the end of the year. Since the end of July, following US-Japan tariff negotiations, the US signed an executive order to lower car tariffs to 15%, while economic data has shown strong performance: revised GDP exceeding expectations, key inflation indicators remaining above 2% for over three years, supporting expectations of a rate hike. Chief Japan economist at Industrial Bank France, Jin Kenzaki, predicts that due to steadily increasing potential inflation rates, rates will be raised to 0.75% in October. However, with the increased political uncertainty following Shizo Abe's resignation, the ruling coalition in the National Diet may not have a majority in both houses, the new leader of the Liberal Democratic Party may face difficulties in forming a cabinet on October 4, if Sanae Takaichi is elected, her previous warning against "premature rate hikes" may delay the rate hike process. As a result, institutions such as BNP Paribas and Barclays have postponed their earlier expectations of a rate hike in October. Historical coordination between the Bank of Japan and the government shows that conflicts have arisen due to policy differences during the normalization of the economy, but doubts dissipated after the massive easing in 2013. Currently, the Bank of Japan is closely monitoring the possibility of a soft landing in the US economy and the risks of weak employment data, with the sustainability of corporate profits and wage growth being crucial. US pre-tax profits for manufacturers fell by 11.5% in the second quarter of 2019, with a sharp decline of 29.7% in transportation equipment manufacturing, if the slowdown in the world's largest economy exceeds expectations, Japanese corporate profits will be under pressure, suppressing wage growth and breaking the benign inflation cycle. The pace of US Federal Reserve rate cuts directly affects the movement of the yen: rapid appreciation exacerbates the shrinking of corporate profits, while excessive depreciation may push up import inflation, forcing the Bank of Japan to accelerate rate hikes. Last week, the US and Japanese finance ministers reiterated not seeking competitive advantage through exchange rates, with some analysts interpreting this as the US hinting that Japan should raise rates rather than intervene to correct the weakness of the yen. This week, the Bank of Japan's policy statement is expected to remain largely unchanged, with Governor Haruhiko Kuroda's press conference becoming a focus. Former Bank of Japan official, Nobuyuki Atake of Rakuten Securities, pointed out that Kuroda needs to balance dovish and hawkish statements - being too dovish may lead to yen depreciation, while being too hawkish may impact the markets. The survey shows that over half of the observers believe that Kuroda tends towards dovishness when maintaining rates, and towards hawkishness when raising rates. On October 3, Kuroda will deliver an important speech, hinting at whether action will be taken at the meeting on October 29-30. Chief strategist at Nomura Securities, Naka Matsuzawa, believes that the next rate hike will occur at the earliest in December, under normal circumstances in January, as expectations of US Federal Reserve rate cuts have already been partially digested, reducing the urgency for action by the Bank of Japan.