At around 11:00 on July 31st (next Wednesday), the Bank of Japan will hold an interest rate decision. According to sources, the Bank of Japan may discuss whether to raise interest rates at next week's meeting and announce plans to reduce bond purchases by about half in the coming years, indicating its determination to steadily withdraw from large-scale monetary stimulus policies.

Four people familiar with the Bank of Japan's thoughts said that the decision on interest rates will depend on how long board members are willing to wait to determine whether consumption will recover and stabilize inflation around the Bank of Japan's 2% target.

More than three-quarters of analysts surveyed expect the Bank of Japan to remain inactive this month and may take the next step in September or October, but sources suggest that the outcome of the July 30-31 meeting is uncertain.

One of the sources said that given the uncertainty of the consumer outlook, "this will be a difficult decision." Another person said, "It is indeed a matter of judgment whether to take action now or later this year

They stated that although the 9-member council generally believes it is necessary to raise interest rates in the short term, they have not reached a consensus on whether to raise 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 over two years. In May, workers' basic wages increased by the highest level in thirty years, enough to convince hawks that the current conditions for interest rate hikes are correct.

However, the recent weak consumption and household confidence have given policy doves reason to temporarily shelve and wait for more data to be released to see if tax cuts and wage increases will boost consumption as expected.

Sources say that the outcome of next week's meeting is uncertain, partly because the Bank of Japan believes there is no convincing reason to rush to raise interest rates, price increases remain moderate, and inflation expectations remain stable around 2%.

One of them said, "It's clear that the Bank of Japan may raise interest rates in the coming months. It's just a matter of time

Bank of Japan Governor Kazuo Ueda once said that if the central bank is confident that strong economic and wage growth in the coming years will keep inflation at around 2% as expected, it will raise interest rates.

Although consumer prices in Japan have been rising since the outbreak of the pandemic, avoiding the long-term price declines that the Japanese economy has experienced repeatedly over the past three decades remains a concern for Japanese policy makers.

After ending negative interest rates in March, the Bank of Japan still maintained short-term interest rates near zero. It is expected that the next interest rate hike will initiate a tightening cycle, during which interest rates will fall to a level that neither cools nor stimulates economic growth - analysts predict around 0.5% to 1.5% - a process that may take several years.

Another source said, "For the Bank of Japan, there is still a long way to go. Raising interest rates again will still keep Japan's monetary situation very loose." Two other sources also echoed this view.

At this month's meeting, the Bank of Japan will also announce details of its quantitative tightening plan, including how to scale back its massive bond buying program over the next one to two years and reduce its nearly $5 trillion balance sheet.

According to sources, the Bank of Japan may gradually reduce its bond buying scale in several stages, roughly in line with mainstream market views, to avoid causing unwelcome yield surges.

This increases the possibility that the Bank of Japan will halve its monthly bond purchases within one and a half to two years - a step advocated by a considerable number of attendees at a meeting between the Bank of Japan and financial institutions last week.

Mitsubishi UFJ analysis suggests that if the Bank of Japan maintains interest rates unchanged at its meeting on July 31, the yen may fall.

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