Japan's central bank is set for further monetary policy tightening, with economists suggesting the new prime minister's surprisingly dovish stance will have minimal impact.

Shigeru Ishiba, elected Oct. 1 as Japan's new prime minister, told reporters the following day, after meeting with Bank of Japan (BOJ) Governor Kazuo Ueda, that the nation's economy "is not ready for further rate hikes." The comments triggered a sell-off of the Japanese currency against the dollar.

"It's hard to think his [Ishiba's] remarks will reverse the Bank of Japan's monetary policy normalization," said Takahide Kiuchi, executive economist at Nomura Research Institute. "Stable long-term interest rates indicate the [policy] rate is on an upward trend."

Central banks are expected to work independently of governments, keeping inflation under control as their main goal. The BOJ, which abandoned its negative rates policy in March after eight years, has raised its shorter-term policy rate twice so far in 2024. The central bank has said it remains open to further rate hikes if wages and inflation continue to rise in a virtuous cycle. The BOJ's stance contrasts with the US Federal Reserve, which pivoted toward policy easing in September, thus increasing pressure on global peers to cut rates.

"There will be no change in the course of rate hikes" in Japan, said Tsuyoshi Ueno, a senior economist at NLI Research Institute. Ueno expects the BOJ to raise its rate to as much as 1% by 2026.

Japan's inflation rate accelerated for four straight months. The consumer price Index, excluding fresh food prices, grew 2.8% year over year in August, up from 2.2% in April. That pace of price increase is well above the BOJ's inflation target of 2.0%.

Ishiba's dovish remarks on the monetary policy did little to bank shares. On Oct. 4, the bank index even gained 1.87%. Banks, especially larger lenders, are expected to improve their net interest margins as interest rates rise. Greater confidence in the economy can boost lending, also supporting banks.