The Bank of Japan will explain its tapering program on Wednesday and debate the timing of its next interest rate hike

At around 11:00 on July 31 (Wednesday), Beijing time, the Bank of Japan announced its interest rate decision and outlook report. Then Bank of Japan Governor Kazuo Ueda held a monetary policy press conference. The policy committee will also debate whether to raise short-term interest rates from 0-0.1%, and the two factions may be evenly matched. However, Japanese media reported that the Bank of Japan may discuss raising interest rates by 15 basis points.

(Dollar/Japanese Yen one-hour chart)

The Bank of Japan is expected to cut its bond purchases in half within a year and a half to two years

The Bank of Japan will detail plans to scale back its high bond purchases and debate the timing of its next rate rise on Wednesday, signalling its determination to steadily unwind a decade of massive monetary stimulus.

The decision comes as the Fed seeks to cut interest rates, possibly as early as September, reversing an aggressive rate-hiking cycle that has pushed up the dollar and led to a painful yen sell-off in Japan.

Expectations of a narrowing US-Japan interest rate spread have lifted the yen off a 38-year low, relieving some pressure on the Bank of Japan to slow the yen's decline by combining higher interest rates with an ambitious tapering programme.

Butforeign exchange trading platformAnalysts say the rebound in the yen also provides an opportunity for the central bank to raise interest rates without giving the market the impression that the central bank is directly targeting the yen's movements through monetary policy.

"The BoJ can move in any direction," said Yoshiki Shinjia, an economic analyst at Daiichi Life Research Institute. "If it wants to raise interest rates now, it can be argued that consumption will rebound on rising wages. If it wants to play it safe, it can wait for more data. In any case, the outlook for consumption is key."

Although the Bank of Japan has maintained that it will not use monetary policy to influence foreign exchange movements, growing concerns about the weakness of the yen have prompted some government and business leaders to call on the central bank to accelerate the adjustment of near-zero interest rates.

Japan will maintain its basic strategy towards the yen and intervention remains an option to deal with excessive exchange rate volatility, said Jun Mimura, Japan's new finance ministry treasurer. Decades of deflation have indeed weakened the effective exchange rate of the yen and the only natural solution is to improve Japan's economic competitiveness and growth potential, Mr. Mimura said.

At its two-day meeting, which ends on Wednesday, the Bank of Japan will decide on a quantitative tightening (QT) programme that could halve monthly bond purchases within a year and a half to two years - in line with mainstream market forecasts.

The policy committee expects inflation to remain around 2% for the next few years

The Japanese economy is at an inflection point, with core inflation staying above the Bank of Japan's 2% target for more than two years and workers' basic wages enjoying the largest increase in three decades.

But rising living costs have hurt consumption, sending the economy into contraction in Quarter 1 and raising doubts about whether households can afford further price increases.

However, with inflation keeping real borrowing costs low, the Bank of Japan is likely to show some signs that it will steadily raise interest rates until 2026 to remove what it sees as excessive monetary support.

These clues or guidance on the path of future interest rate hikes are likely to come from the post-meeting press conference of Kazuo Ueda, the governor of the central bank, or the quarterly outlook report released after the meeting.

According to sources, in this report, the Bank of Japan is likely to roughly maintain its forecast made in April that inflation will remain near its 2% target for the next few years.

Mr. Ueda has said the central bank would raise rates further if it was convinced that wage increases would push up service sector inflation and keep it near its 2 per cent target for a long time.