After the brief 'day trip' of the Asia-Pacific stock market, the sentiment is depressed again today.

On Tuesday, as the Bank of Japan began its two-day monetary policy meeting, the Asia-Pacific region's markets fell across the board, and the previous rebound momentum was reversed.

As of press time, the MSCI Asia-Pacific Emerging Markets Index has fallen 0.4%. The Korea Composite Index fell 0.99%, the Indonesian Composite Index fell 0.7%, the Australian S&P200 Index fell 0.46%, the Hang Seng Index fell 1.44%, and the SSE Composite Index fell 0.43%.

Due to the uncertainty caused by the decision on interest rates by the Bank of Japan, Japan's stock market, which had experienced a 'little carnival' yesterday, also fell at one point in the trading day.

However, the Nikkei 225 Index is now up 0.15%, and the TOPIX Index is down 0.19%. Since July 11th, the Nikkei 225 Index has fallen for several days, with a cumulative decline of nearly 8%.

Market turbulence is mainly centered around the meetings of the US Federal Reserve and the Bank of Japan this week.

At present, the market has basically digested the expectation that the Fed will stay put in July, but the question of whether the 'super hawkish' Bank of Japan will appear is full of uncertainty.

The decision on raising interest rates by the Bank of Japan is 'up in the air'.

Today, the Bank of Japan's two-day interest rate meeting begins, and there are many speculations about its decision.

As the market has generally agreed on the pace of the Bank of Japan's cutback in bond purchases, the focus now is on the interest rate policy.

However, analysts have mixed opinions on whether they will choose to raise interest rates, especially given recent fluctuations in the yen exchange rate.

'Hawkish' analysts expect the Bank of Japan to raise interest rates by 10-15 basis points, as recent inflationary pressures in Japan have provided a reason to do so, and part of this inflationary pressure is driven by wage increases.

This is consistent with the Bank of Japan's consistent position that the inflation rate can continue to reach its 2% annual target, which may provide the necessary space for the Bank to tighten monetary policy.

'Conservative' analysts believe that concerns about economic slowdowns may lead the Bank of Japan to maintain the current interest rate. The Bank of Japan has always stressed the importance of maintaining a relatively loose monetary environment to stimulate economic growth.

Recent economic data shows that Japan's first-quarter contraction was greater than expected, with weak consumer spending being a major factor. This may cause the Bank of Japan to reconsider or postpone interest rate hikes.

The Bank of Japan will detail its plan to reduce large-scale bond purchases on Wednesday and discuss the timing of its next interest rate hike.

Due to the US-Japan interest rate differential, the yen has experienced a prolonged period of weakness. To alleviate the pressure, the Bank of Japan plans to combine interest rate hikes with a reduction in bond purchases to slow the decline of the yen.

However, over the past two weeks, the yen has appreciated significantly against the US dollar. The reasons for this are the result of a combination of factors, including suspected market intervention, closing of arbitrage trades, and expectations that the Fed may cut interest rates.

The recent rebound of the yen has put pressure on the Bank of Japan, forcing it to carefully consider its policy choices.

In addition, due to concerns about weak consumer spending, Bank of Japan Governor Haruhiko Kuroda remains cautious about raising interest rates.

A Dutch bank analyst pointed out that while there may still be a possibility of making a minor 15 basis point rate hike decision, the continued negative growth in real wages may lead the Bank of Japan to maintain its policy rate unchanged.

The central bank emphasizes that although the 'virtuous cycle' of wage growth and consumption is strengthening, actual wage growth has not turned positive, which may affect the Bank of Japan's decision to maintain a stable interest rate.

Is the Bank of Japan more powerful?

In the next few days, the actions of Powell and Haruhiko Kuroda could cause turbulence in global financial markets.

It is expected that the Federal Reserve will not make any changes to the federal funds rate at its July meeting, but traders will look for clues as to whether the Fed will cut interest rates in September during this meeting.

CME's 'FedWatch' tool shows that the probability of standing pat in July has risen to 95.5%, while the probability of an interest rate cut in September is 89.6%.

Compared to the Federal Reserve, the Bank of Japan is more likely to shake the market with its decision.

Analyst Garfield Reynolds pointed out that the Bank of Japan is more likely than the Federal Reserve to surprise. Although the core inflation rate has remained at or above the central bank's target level since April 2022, Bank of Japan Governor Haruhiko Kuroda's performance since taking office has been disappointing for those who expect decisive action from the central bank.

This lowers the threshold for the unexpected emergence of hawks - if the path of reducing bond purchases and raising interest rates is bold enough, even keeping rates unchanged could lead to surprises.

If the joint action of the Bank of Japan and the Federal Reserve is favorable to the yen, the yen seems likely to soar again. Even after shorting the yen rapidly decreased from its historical extreme, it remains fragile.

Bank of America believes that if the Bank of Japan turns hawkish, the yen could rise to 145 against the dollar.

'If the Bank of Japan decides to raise its policy rate and announces a plan to quickly reduce the scale of its bond purchases, such as reducing its monthly bond purchase amount to around 3 trillion yen within a year, the market will see this as the Bank of Japan turning hawkish and will bet on a faster interest rate increase, thereby causing greater volatility in the entire yen market.'