06:36 AM EDT, 07/31/2025 (MT Newswires) -- The initial reaction from the financial markets to the decision by the Bank of Japan to leave the key policy rate unchanged overnight Wednesday was to buy the yen (JPY), said MUFG.

The only new news related to the updated forecasts and as expected the BoJ has raised its inflation forecasts, wrote the bank in a note to clients. While the inflation forecast lift for this fiscal year was notable -- 2.7% from 2.2%, the 2026 increase was much more conservative -- 1.8% from 1.7% while in FY2027 the BoJ now sees inflation at 2.0% versus 1.9%.

All in, the 2026 change suggests scope for caution, but the FY27 level does give Governor Ueda Kazuo and the BoJ the license to hike the policy rate at some stage through the remainder of this year, stated MUFG.

However, the 0.1ppt increases in both FY26 and FY27 were the least the markets could have got and in that regard, the forecast changes to the bank are more conservative than could have been the case. The BoJ only toned down its description of the level of uncertainty from "extremely uncertain" to "highly uncertain," which to MUDF was a bit on the dovish side.

At this juncture, there is nothing that has been said that will give the markets more conviction over the BoJ tightening over the coming few meetings, added the bank,. But Governor Ueda has been clear that the progress toward price stability is continuing and in that sense the justification for acting at some point this year remains.

However, Governor Ueda has stated that the likelihood of achieving the inflation goal has risen only "slightly" and that the BoJ would "closely monitor" upside inflation risks. That does point to the potential for a rate hike, possibly at the October meeting, according to MUFG.

However, the word "slightly" again underlines a still cautious tone which the bank believes may disappoint those anticipating increased pricing for a rate hike over the coming meetings. There is nothing in the press conference to suggest increased urgency and a September hike is unlikely.

With political uncertainty still high, October is certainly the earliest time to consider a move, pointed out MUFG. A lot can happen by the time of the meeting on Oct. 30 and the bank doesn't see enough in this press conference for pricing with increased conviction on a rate hike over coming meetings.