The Bank of Japan may raise rates and reduce bond purchases this week, but the strength is unclear!

Markets are predicting that the Bank of Japan will raise interest rates and reduce bond purchases this week, but it is not clear the strength of the

Markets expect the Bank of Japan to raise interest rates and reduce its purchases of Japanese government bonds, but the strength of both actions is unclear.

Economists surveyed expect the BOJ to raise its benchmark interest rate to 0.1 percent from the current 0 percent to 0.1 percent. Other experts expect the BOJ to raise rates much higher.

Analysts at Holland International predicted in a report last week that the rate could rise to 0.15 percent, while Bank of America expects it could be as high as 0.25 percent.

Bank of Japan Governor Kazuo Ueda said in June that the central bank may raise rates “based on economic, price and financial data and information at the time”.

The meeting will also look at how the BOJ plans to scale back its bond-buying program, as it said in June it would reduce purchases of Japanese government bonds “to ensure that long-term interest rates are shaped more freely in financial markets”.

According to data released in March, the Bank of Japan is currently purchasing about 6 trillion yen ($39 billion) of Japanese government bonds each month, and according to relevant calculations, as of 19 July, the Bank of Japan held as much as 579 trillion yen of Japanese government bonds.

Sources said the BOJ may gradually scale back its bond purchases in several stages, at a pace roughly in line with the mainstream market view, to avoid causing an unwelcome spike in yields.

Predict the Bank of Japan rate hike institutional views

1.OCBC: BOJ to minimally scale back JGB purchases and may raise rates by 10 bps;

（1）The bank's analysts Selena Ling and Frances Cheung believe that the BOJ has a favourable macro backdrop for policy tightening and that inflation will remain at the target level as recent data show that inflation wages are in a virtuous cycle;

（2）They believe that the BOJ will minimally scale back its purchases of Japanese government bonds and may raise interest rates by 10 basis points;

2.Allizgi: BOJ may reduce bond purchases and raise rates this week

（1） Gregor Hirt, Allizgi's global chief investment officer in charge of multi-asset business, said the Bank of Japan will probably reduce bond purchases and raise interest rates at its July meeting. He expects the BOJ to scale back bond purchases based on market views to avoid market turmoil. Attention needs to be paid to the timetable, magnitude, and yield of the reduction in bond buying. He said there is more uncertainty about a rate hike due to the limited guidance given by the BOJ, but recent data seems to be enough for the BOJ to take action, and the BOJ could seize the opportunity to leave the zero interest rate range before external factors such as a possible slowdown in the U.S. economy makes it more difficult to raise interest rates;

（2）He added that a rate hike could help stabilize the yen, which is key to consumption and sentiment, despite concerns that higher interest rates will affect consumption;

3.Oxford Economics: expect the Bank of Japan will reduce its monthly treasury bond purchases by 0.5 trillion yen per quarter;

（1）Oxford Economics previously expressed the view that the Bank of Japan is expected to reduce its monthly Japanese government bond purchases by 0.5 trillion yen per quarter while avoiding a sharp rise in yields by emphasizing flexibility and predictability;

（2）The agency believes that further acceleration of the pace of purchase reductions is possible, but would increase the risk of market disruption. Doubling the reduction in purchases to 1 trillion yen per quarter would reduce the BOJ's share of outstanding Japanese government debt to 41%;

4.DHF Capital: Reducing the size of monthly bond purchases could also prompt further yen strength;

（1）The Bank of Japan's rate hike this week could push up Japanese bond yields, said Kooijman, CEO and asset manager at DHF Capital. A possible rate hike and a reduction in the size of the Bank of Japan's monthly bond purchases could also prompt further yen strength;

（2）He also pointed out that these moves would represent a major shift in Japan's monetary policy, affecting bond yields;

5.Bank of America: If the Bank of Japan turns hawkish yen against the dollar, it is expected to rise to 145 (i.e., the dollar fell to 145 against the yen);

（1) Bank of America thinks the yen could rise to its highest level since January if the Bank of Japan raises interest rates on Wednesday and hints at a quick cut in bond purchases;

（2）Bank of America strategists such as Izumi Devalier wrote: “If the BOJ decides to raise its policy rate and announces a plan to quickly cut the size of its bond purchases, for example to about 3 trillion yen per month within a year, the market will see this as a shift to hawkishness by the BOJ and will bet on a faster rate rise, leading to increased volatility across the yen market. To catch up with spreads, the yen could rise to 145-148 yen per dollar;”

（3）Bank of America's baseline forecast is for the Bank of Japan to raise rates on Wednesday and gradually reduce its bond purchases to 3 trillion yen per month by mid-2026. The bank expects the dollar to be at 151-154 against the yen in the short term; the strategist also noted, “Given the lack of momentum in the domestic economy, we think any rate hike will be viewed as a dovish hike if there is no plan to cut the size of the bond purchases quickly.”