Despite the LDP's electoral shock, Japan's central bank is expected to remain resolute in its decision to raise interest rates, according to analysts.

• Despite the ruling LDP losing its lower house majority, the Bank of Japan is unlikely to halt its rate hike cycle.
• The BOJ is predicted to maintain its rates during its policy announcement on Thursday.
• The BOJ will independently normalize Japan's monetary policy regardless of the political environment, according to analysts.

Despite Japan's Liberal Democratic Party potentially facing an election shock, analysts predict that the Bank of Japan will continue with its interest rate hike cycle.

In Sunday's elections, the LDP lost its majority in Japan's lower house for the first time since 2009. The LDP will need to work with other parties to form a government, including its junior coalition partner Komeito. A minority government could also be a possibility.

David Boling, director of Japan and Asian trade at Eurasia Group, stated on CNBC's "Squawk Box Asia" that the outcome was a blow to the LDP.

On Monday, he stated that the LDP sustained injuries, including a black eye and a bloody nose, but they are still standing, as is Ishiba, and they remain the largest faction in the lower house.

The LDP will remain in control of forming a coalition government, as stated by him, which is positive news.

This week, the Bank of Japan will meet, and according to a poll by Reuters, about 86% of economists expect the central bank to keep its rates unchanged when it makes its announcement on Thursday.

Bank of America's chief Japan economist, Izumi Devalier, stated that the likelihood of the BOJ raising interest rates this week is "almost certainly zero."

Devalier stated that political uncertainty and instability may delay the BOJ's rate hikes, but the BOJ cannot ignore the sustained weakness in the yen.

The BOJ may not be on hold for the foreseeable future, even if the market developments suggest it. We could still be on track for hikes in January or December, depending on the yen's direction, she said.

Katsuhiko Aiba, Citi's Japan economist, believes that while some people think government instability may make it hard for the BOJ to raise interest rates, this is not necessarily the case.

The BOJ is unlikely to deviate from its rate hike cycle due to the government's influence, even after the Lower House election. However, there is a risk if Prime Minister Ishiba resigns and Sanae Takaichi becomes the new LDP leader.

Recently, Takaichi lost the LDP party election to Ishiba and had previously served as minister in charge of economic security. She supports monetary easing and reportedly cautioned the BOJ against raising rates in September.

Following the election, Monex Group's expert director Jesper Koll predicts that the BOJ will become more independent and continue to pursue its objective of normalizing its monetary policy.

Politicians will become more desperate and make bold calls for BOJ action, but unlike Ishiba, BOJ Governor Ueda is competent and has the people's support.

Market implications

On Monday morning, the benchmark increased by 1.73%, leading gains in Asian markets, while the weakened to a three-month low, trading at 153.49. A weak yen typically benefits Japan's stocks, which are heavily dependent on exporters.

Devalier from BofA stated that market fluctuations could be a "knee jerk" reaction, and investors should wait until the week ahead to determine the outcome.

Despite the views of LDP leaders, Japan's CEOs are achieving success by prioritizing shareholder value and profitable investments, according to Monex Group's Koll.

The Nikkei will rise by 18% to 20% over the next 12 to 15 months as corporate earnings and profits exceed expectations, according to his forecast.

In July, Koll predicted that the Nikkei would reach 55,000 points by the end of 2025, based on the expectation of improving corporate earnings.

The formation of a coalition government is predicted to increase stock prices and weaken the yen, as observed in Monday's trading.

The depreciation of the yen could lead to interest rate hikes, according to him, as he mentioned that the SMBC is closely monitoring the exchange rate.