The Bank of Japan (BOJ) decided to reduce the amount of its bond purchases at a monetary policy meeting held on July 14, but postponed the specific plans to its July meeting. As a result, the market is reacting that the BOJ's policy "fell short of expectations." With the U.S. interest rate cuts being delayed, the interest rate gap between Japan and the U.S. is not narrowing, and the BOJ is buying time by gradually disclosing its policies while taking a stance to suppress yen depreciation.

BOJ Governor Haruhiko Kuroda said at a press conference following the July 14 meeting, "Recent yen depreciation is a factor in rising prices, and we are closely monitoring the policy operating situation." He added, "We need to recognize that the impact of exchange rate fluctuations on prices has become greater than in the past." After deciding to lift the "emergency easing" at its March meeting, the yen continued to weaken despite his repeated emphasis that "the easing situation will continue for some time." After the April meeting, Kuroda's remarks were interpreted as condoning yen depreciation, causing the yen to plunge to 160 yen per dollar. This was a major factor in the Ministry of Finance and the BOJ intervening in the market to the tune of 9.7885 trillion yen.

After meeting with Prime Minister Fumio Kishida at the Prime Minister's Office on May 7, Kuroda revised his statement, saying, "We are closely monitoring yen depreciation." The market expected the BOJ to finalize its bond purchase reduction plan at this meeting and then raise interest rates at its July meeting. Kuroda explained the delay in finalizing the bond purchase reduction plan, saying, "We wanted to carefully decide after listening to market opinions." However, Nobuhiro Kimura, an economist at Nomura Research Institute, speculated, "The materials are all out, and they were conscious of the risk of further yen depreciation."

The Federal Reserve (FRB) kept interest rates unchanged at a Federal Open Market Committee (FOMC) meeting on July 12 and revised its forecast for the number of rate cuts this year from three to one. It is unlikely that the yen's depreciation trend will reverse unless the U.S. lowers rates. "The BOJ probably wanted to keep the yen-weakening effect going as long as possible until the U.S. lowers rates," Kimura said.

The most effective card the BOJ has to alleviate yen depreciation is to raise interest rates. However, raising interest rates would also have a negative impact on the economy, such as higher mortgage rates and corporate financing. Japan's real GDP (seasonally adjusted) in the January-March quarter fell 1.8% year-on-year. The April-June quarter is expected to be affected by negative factors such as production halts due to certification irregularities at major companies like Toyota Motor. It is difficult to say that the economy is strong at present. "If they can't raise rates and they are told to respond to yen depreciation, then they are at a dead end. They will have to accept a rate hike at some point," said a former BOJ official.

The key is when to make that decision. Kuroda said he would consider additional rate hikes once a virtuous cycle of wages and prices is confirmed, and at the July 14 press conference he also said, "It is certainly possible" to raise rates in July. However, not many people take this literally. Among market players, the consensus is that "it is difficult to imagine reducing bond purchases and raising rates at the same time," and that the rate hike will be postponed to September or later.

Meanwhile, experts are divided on the impact of the BOJ's reduction in bond purchases on the market. Some experts expect that long-term interest rates will rise as bond purchases are reduced, while others believe that the impact of the BOJ's policy on the market will be limited. It is necessary to keep an eye on the BOJ's future policy direction and the market's reaction.