On Wednesday, sources said that the Bank of Japan may debate whether to raise interest rates at next week's meeting and announce a plan to roughly halve the scale of bond purchases over the next few years, indicating the Bank of Japan's determination to steadily exit its massive monetary stimulus policy. As a result of the news, the USD/JPY temporarily fell 30 points. Product structure, 10-30 billion yuan products operating income of 401/1288/60 million yuan respectively.

Four people familiar with the Bank of Japan's thinking said that the interest rate decision will depend on how long committee members want to wait to clarify whether consumption will recover and stabilize inflation around the bank's 2% target.

A Reuters survey showed that more than three-quarters of economists expect the Bank of Japan to hold steady this month, with the next rate hike possibly in September or October, but there are reports that the outcome of next week's rate decision is not so certain.

"Given the uncertainty of the consumption outlook, this will be a difficult decision," said one source. Another source said," It is really difficult to make a decision to take action later this year."

They said that while the nine-member committee generally believed that it was necessary to raise interest rates in the near future, there was no consensus on whether to raise interest rates next week or later this year.

Japan's core inflation rate reached 2.6% in June, exceeding the Bank of Japan's target for more than two years, and the basic wage increase for workers in May was the largest in 30 years, enough to make hawkish camps believe that the conditions for rate hikes are ripe now.

However, weak consumption and low household sentiment in recent times have helped dovish camps to come up with reasons to hold steady temporarily and wait for more data to see if tax cuts and wage increases will boost consumption as expected.

Sources said that the outcome of next week's meeting is still uncertain, in part because the Bank of Japan believes that there is no need to act hastily because price rises are still mild and inflation expectations are stable at around 2%.

"It is clear that the Bank of Japan may raise rates in the coming months. It's just a matter of timing," one said.

Bank of Japan Governor Haruhiko Kuroda said that if the bank is confident that the steady growth of the economy and wages will keep the inflation rate at around 2% in the next few years, it will raise interest rates.

Although consumer prices in Japan have been rising since the outbreak of the new crown epidemic, freeing the economy from the long-term deflation experienced over the past 30 years is still a concern for Japanese decision-makers.

The Bank of Japan ended its negative interest rate policy in March and currently maintains short-term interest rates near zero. The next rate hike is expected to mark the start of a tightening cycle, bringing interest rates to a level that neither inhibits nor stimulates growth. According to analysts' forecasts, this level is roughly between 0.5% and 1.5%, and the entire process may take several years.

"There is still a long way to go for the Bank of Japan. Another rate hike still keeps the country's monetary conditions very loose," said one source. Two other sources agreed with the view. However, many market participants still expect the Bank of Japan to take more rate hike action this year.

The Bank of Japan's interest rate decision is also facing pressure from the policy side, as several top Japanese economic commissioners reportedly urged the Bank of Japan to raise interest rates.

At a meeting of Japan's top economic commission last week, Prime Minister Fumio Kishida, major economic ministers and Bank of Japan Governor Haruhiko Kuroda all attended. Meeting minutes released on Wednesday showed that some committee members believed that the Bank of Japan had to raise interest rates to prevent the yen from depreciating too much.

Mana Nakazora, strategist for Credit Suisse in Japan, who attended the meeting, said it was important for monetary policy to move towards normalization more freely if widening US-Japan interest rate spreads weaken the yen and hurt consumption. Another member, Takeshi Niinami from sake brewer Suntory, also agreed. In addition, some politicians have called on the Bank of Japan to clarify its rate hike plans further to prevent the yen from falling to new lows against the dollar.

At this month's meeting, the Bank of Japan will also announce details of its quantitative tightening (QT) program, explaining how it will reduce its huge bond purchases over the next one to two years and shrink its assets and liabilities by nearly 5 trillion US dollars.

Sources said the Bank of Japan may gradually reduce bond purchases in several stages, with the speed of reduction in line with the mainstream market view, to avoid causing an unwelcome surge in yields.

This increases the possibility that the Bank of Japan will halve its monthly bond purchases over the next one and a half to two years. Many attendees at last week's meeting of the Bank of Japan and financial institutions advocated such a move.

Editor/Lambor