The Bank of Japan (BOJ) is set to announce its latest interest rate decision next week, with the market widely expecting the central bank to keep short-term interest rates unchanged at 0.25%. However, as concerns over a U.S. economic recession are fading and there is a need to prevent speculators from excessively devaluing the yen, this could imply a less dovish policy outlook for the central bank.

Since ending its decade-long aggressive easing policy in March this year, the BOJ has signaled an intention to continue raising interest rates from extremely low levels. However, after its rate hike in July was blamed for causing a market crash, the BOJ was forced to soften its stance and promised to raise rates slowly, or even pause rate hikes.

Analysts have said that although the BOJ does not seem to be in a hurry to raise rates, a shift towards a less dovish stance would highlight its desire to leave room for maneuver in the timing of its next moves. This could also help prevent the yen from further bottoming out, as the depreciation of the yen has increased the cost of fuel and food imports, thereby harming already weak consumption.

The yen has recently resumed its downward trend. Ryutaro Kono, Chief Japan Economist at BNP Paribas, said, "As the yen falls again, the BOJ may try to avoid sending messages that appear overly dovish."

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In a quarterly report to be released after this meeting, the BOJ is expected to maintain its forecast that inflation will remain around 2% until early 2027 without significant changes. Most recent domestic data in Japan have largely supported the BOJ's view that rising wages and the prospect of continued wage growth are supporting consumption and prompting more companies to raise not only product prices but also service prices.

Three sources familiar with the BOJ's thinking said that the worsening labor shortage has also intensified expectations that companies will continue to raise wages next year. One of the sources said that the Japanese economy is on a recovery track. Another source said that prices may continue to rise because many companies have not yet fully passed on the increased costs. The BOJ may reflect these progress in wages and prices in the report, highlighting its signal that the prerequisites for further rate hikes are being formed.

However, the market will pay more attention to the BOJ's view on risks, as BOJ Governor Haruhiko Kuroda has emphasized that market instability and concerns about a U.S. economic recession are the main reasons for the BOJ to slow the pace of rate hikes.

After meeting with finance ministers from major economies in Washington this week, Kuroda expressed a cautiously optimistic view of the global economic outlook. He said on Thursday, "Optimism about the U.S. economic outlook seems to have expanded," but whether this optimism will continue needs further observation.

The BOJ may also guide expectations by modifying the part of the report on future policy guidance. In the latest report released in July, the BOJ said it would continue to raise rates if the economic and price conditions are in line with its forecasts. Sources said the board may discuss whether additional wording on risks or policy shift triggers should be added to the guidance.

The BOJ ended negative interest rates in March and raised short-term interest rates to 0.25% in July due to Japan's progress in achieving a sustainable 2% inflation target. Kuroda has repeatedly said that if the economic trend is in line with its expectations, the BOJ will continue to raise rates. However, he also said that since inflation is still moderate, there is no rush to take action.Most analysts anticipate that the Bank of Japan (BOJ) will not raise interest rates again this year, but the majority expect a rate hike before March next year. The International Monetary Fund (IMF) welcomed the BOJ's rate hike in July on Thursday and called for a gradual increase in interest rates.

However, political uncertainty and a renewed decline in the yen have complicated the communication of the Bank of Japan. While the Japanese government hopes to proceed cautiously to avoid disrupting the market, a tone that sounds too dovish may provide speculators with an excuse to sell the yen - a dilemma acknowledged by Haruhiko Kuroda in Washington.

Haruhiko Kuroda said to a panel of the IMF on Wednesday: "When there is great uncertainty, you usually want to proceed cautiously and gradually. But the issue here is that if you move at a very, very slow pace and create expectations that interest rates will remain low for a long time, this could lead to a significant accumulation of speculative positions, which could become a problem. We need to find the appropriate balance."