BOJ Rate Hike Ignites Yen Weakness and Nikkei Rally

The Bank of Japan (BOJ) raised its overnight call rate by 25 basis points at its September meeting, taking it to 1.25%. However, two board members, Toichiro Asada and Ayano Sato, voted against the increase, arguing that economic conditions were not strong enough to justify another hike.

The decision was seen as dovish, with the yen weakening and the Nikkei rallying in response. The BOJ's inflation risks remain tilted to the upside, with underlying CPI inflation approaching 2% and wage increases being passed through to selling prices.

BOJ Governor Ueda's press conference will be closely watched for his views on the economy and inflation. He faces a challenge in presenting a sufficiently hawkish case to justify the tightening path already embedded in the OIS curve, which prices roughly another two-and-a-half 25-basis-point hikes by mid-2027.

The yen's weakness has led to a rebound in the USD/JPY pair, breaking above key resistance levels. The Nikkei also rallied, testing key four-hourly resistance zones.