The Bank of Japan left its key policy rate unchanged for the sixth month running on Thursday, as expected in the wake of a global markets shake-out, with the focus now on how long it will delay its next hike.
Only hawkish board member Atsushi Mizuno dissented, and markets showed limited reaction to the 8-1 vote to keep rates at 0.50% by the first G7 central bank to hold a formal rate review since last week's market turmoil.
"There is no surprise at the decision, given the recent global financial market turmoil," said Yasunari Ueno, chief market economist at Mizuho Securities.
Just a month ago many investors had expected a quarter percentage point rate hike in August to take Japanese rates to a decade-high 0.75%.
But market gyrations triggered by U.S. credit problems and the Federal Reserve's resulting cut in its discount rate for lending to banks saw almost all give up on an early Japanese move.
Uncertainty about the markets has also prompted doubts about a Japanese rate hike in September, with futures contracts showing only a roughly 50% chance the central bank would resume its policy of raising rates towards more normal levels.
For that reason, markets were focused on what BOJ Governor Toshihiko Fukui -- who has underlined the need to boost rates -- would say about market turbulence and the outlook for the U.S. economy at a news conference from 3:30 p.m. Tokyo time.
"The question is what governor Fukui has to say about global growth and the risks to the outlook," said Hiroshi Shiraishi, an economist at Lehman Brothers Japan. "My sense is that he sort of mentions the risk to global growth and maybe softens the language on the global growth outlook. But he is going to keep the BOJ's baseline view that the global economy will hold up and reiterate the BOJ's intention to gradually raise interest rates," he added.
Ahead of the rate decision, Tokyo stocks rose more than 2% as Toyota Motor and other blue-chip exporters surged on a fall in the yen, which stood at just less than 116 yen per dollar on Thursday after surging to a 14-month peak of 111.60 yen last Friday.
The Nikkei has risen almost 7% this week, recouping nearly 70% of the losses it booked last week when it tumbled 8.9% in its biggest weekly drop in seven years.
Expectations for a rate rise this week -- as measured by swap contracts on the overnight call rate -- had fallen to just 10% from about 75% earlier this month.
Investors now see a roughly 50-50 chance of a rate move in September or around 65% chance by October.
If the Fed cuts its main policy rate at its Sept. 18 meeting or before, as many economists now expect, the Bank of Japan could decide to keep rates steady at a policy meeting ending on Sept. 19 and wait even longer to act, they say.
The Bank of Japan has cited a softening U.S. economy as a risk factor for the Japanese economic outlook.
In contrast, the European Central Bank reminded markets on Wednesday of its Aug. 2 monetary policy stance, a move some analysts viewed as a signal that it was still likely to raise interest rates at its Sept. 6 meeting.
Fukui has underlined the need to boost rates as the BOJ fears large swings in the economy or misallocation of funds if people come to expect Japanese interest rates to stay low for a long time despite the nation's steady economic growth.
But the BOJ has repeatedly said it will lift rates only gradually. It ended its zero rate policy and raised rates to 0.25% last July, Japan's first rate hike in six years. It then raised the overnight call rate target to 0.5% in February as the economy continued to expand.