The tightening of monetary policy by the Bank of Japan last week sparked a wave of criticism as it led to a historic crash in the Japanese stock market and exacerbated global market turbulence, which could shelve further interest rate hike plans.

"The Bank of Japan needs to remain humble towards economic data and the market," said Nobuyasu Atago, chief economist at Rakuten Securities Economic Research Institute and former BOJ official. "The Bank of Japan raised rates in the face of bad economic data, indicating that it was not paying attention to the data."

Last week, Bank of Japan Governor Haruhiko Kuroda stressed several times that the Bank of Japan decided to raise interest rates based on economic and inflation data, which showed that the economic situation was consistent with previous expectations. He also said that as long as this trend continues, interest rates will continue to rise. However, the most serious stock sell-off in decades is now causing analysts to begin to think that the bank's action was premature. Many are changing their expectations.

"This was a poorly timed rate hike," said Mari Iwashita, chief market economist at Daiwa Securities. "The Bank of Japan will have to wait and watch whether the US economy will enter a recession or a soft landing before it can take the next step. At the very least, a rate hike in September or October is no longer possible."

The Bank of Japan's rate hike decision on July 31 helped the yen rebound from near-decades lows. The yen rose about 8% against the US dollar over the past week, but the rapid rise of the yen is now hitting the profit outlook for exporters, leading to stock market declines. In addition to raising interest rates, the Bank of Japan has ended its plan to purchase ETFs, which were tools that officials may have used to prevent stock market crashes.

Before this recent wave of volatility, most economists expected the Bank of Japan to rate hike again before the end of the year. Last week, in a Bloomberg survey, 68% of respondents predicted the BOJ's policy rate would reach 0.5% by year-end, up from its current level of 0.25%.

Since the era of Haruhiko Kuroda, the Bank of Japan has been taking a very gradual approach to exiting monetary stimulus policies. This has led some global observers to perceive a policy shift in last Wednesday's BOJ decision to raise the benchmark rate to its highest level in over a decade and reduce bond purchases.

However, others supported the central bank's latest decision and attributed the recent market turbulence to US data and the Federal Reserve's decision last week not to cut rates.

"The Bank of Japan did not act too early," said Jesper Koll, director at Monex Group Inc. "Normalization is the right thing to do." He has long been a supporter of the Japanese stock market. "Japan's interest rate hike is not the problem, but balancing the interest rate without using dovish language is a negative shock."

Jin Kenzaki, head of Japan research and chief Japan economist at Societe Generale, said if the market calms down from its view of the possibility of a US economic downturn, the Bank of Japan may rate hike again around December.

Regardless, he said that the current market's "free fall" is more driven by developments in the US. "If the market is pricing a US recession correctly, then the Bank of Japan may certainly decide not to raise rates this year."

Editor/Lambor