Two black swans are coming: the Bank of Japan raises interest rates and reduces bond purchases

The Bank of Japan said it would reduce the amount of Japanese government bonds it buys in a predictable manner. "Price increases require attention, and the easing policy will be adjusted according to the realization of the outlook. The amount of Japanese government bond purchases will be announced quarterly, and the amount of Japanese government bond purchases will be reduced in a predictable manner."

The bank said it would conduct a mid-term review of bond purchases in June 2025. The bank plans to purchase 7.5 billion yen of Japanese government bonds twice a month from August to September, with a term of more than 25 years, compared with 5 billion to 10 billion yen twice a month previously.

"Core consumer price index inflation is expected to rise gradually, and the Bank of Japan voted unanimously to reduce the scale of bond purchases. If the outlook for economic activity and prices is realized, the Bank of Japan will continue to raise policy rates and adjust the degree of monetary easing."

The Bank of Japan said that the median forecast for the core consumer price index (CPI) in fiscal 2024 is 2.5%, and the forecast in April was 2.8%; the median forecast for the core CPI in fiscal 2025 is 1.9%, and the forecast in April was 1.9%; the median forecast for the core CPI in fiscal 2026 is 1.9%.

The median forecast for real gross domestic product (GDP) growth in fiscal 2024 is 1.0%, and the forecast in April was 0.8%; the median forecast for real GDP growth in fiscal 2025 is 1.0%, and the forecast in April was 1.0%; the median forecast for real GDP growth in fiscal 2026 is 1.0%.

Wednesday is a crucial day for the US dollar, with the focus on the FOMC interest rate decision and press conference.

Economists predict that the Federal Reserve will keep interest rates unchanged, and the FOMC press conference has become the focus.

Fed Chairman Powell's stance on inflation, the labor market, and the timing of the Fed's rate cuts will be critical. Labor market concerns and declarations of victory in the inflation battle could foreshadow rate cuts in September and December.

A more dovish Fed rate path would support USD/JPY below 150, while inflation concerns could push USD/JPY above 155. Powell said in July that second-quarter inflation data strengthened confidence that inflation would return to the 2% target.