After the Federal Reserve's "doves" significantly cut interest rates by 50 basis points and the "hawks" tightened expectations for further rate cuts, the market's focus has shifted to the Bank of Japan.

On Friday morning (September 20th), the Bank of Japan announced its September interest rate decision, with Governor Haruhiko Kuroda scheduled to hold a press conference at 14:30.

At the end of July this year, the Bank of Japan's unexpected rate hike triggered a "yen carry trade unwinding" and caused unprecedented turmoil in the financial markets.

This time, how should the Bank of Japan act?

Investment banks such as Bank of America Merrill Lynch, Morgan Stanley, and Goldman Sachs unanimously believe that the Bank of Japan will stand pat on Friday, keeping the policy interest rate unchanged at 0.25%.

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Despite stable economic and inflation data in Japan since July, the Bank of Japan wishes to advance the normalization of monetary policy.

However, institutions believe that the current yen trend and the rise in economic and political uncertainties mean there is little need for a rate hike in the short term.

Haruhiko Kuroda's speech may signal the next rate hike and assess current inflation and economic data.

Goldman Sachs and Bank of America Merrill Lynch predict that the next rate hike by the Bank of Japan will be in January next year.

Meanwhile, the painful memories of "Black Monday" in August are still fresh in the market's mind, which continues to closely monitor the US-Japan interest rate differential and the yen trend.

The policy direction of the Federal Reserve and the Bank of Japan will undoubtedly have an impact on the capital market.

For the Bank of Japan's monetary policy meeting on Friday, the market generally expects it to "stand pat," maintaining the policy guidance and keeping the policy interest rate unchanged at 0.25%.

Morgan Stanley expects the Bank of Japan to maintain its current monetary policy.

The bank believes that the Bank of Japan is still in the stage of assessing the impact of the unexpected rate hike in July, especially considering the lag effect of price transmission and the upcoming political elections, and is not in a hurry to raise interest rates again.

Morgan Stanley wrote: As Deputy Governor Masayoshi Amamiya said on August 28th, the Bank of Japan is currently in the stage of assessing the effects of the July rate hike, and needs to carefully evaluate the impact of domestic and international market developments on the economic and price outlook.

Despite wage increases, the price transmission to the private sector is still lagging, and with the LDP presidential election approaching, the Bank of Japan has no urgent need to raise interest rates in the short term.

Morgan Stanley plans to focus on Governor Haruhiko Kuroda's speech and his assessment of inflation and economic data since the July rate hike.

Morgan Stanley believes that Kuroda may give a "smooth progress" evaluation of domestic demand in Japan, especially personal consumption.

Goldman Sachs also expects the Bank of Japan to stand pat this time, and 53 analysts surveyed by Bloomberg unanimously believe that the Bank of Japan will maintain the current interest rate.

At the same time, Bank of America Merrill Lynch also holds the same view and stated that the strengthening yen and the rise in economic and political uncertainties have reduced the urgency of a rate hike in the short term.

The bank wrote: The situation over the past month has further strengthened the Bank of Japan's motivation to wait and see, including: 1) increased market volatility after the July meeting, which needs to be monitored for its impact on the economy; 2) the strengthening yen; 3) increased uncertainty about the US economic outlook; 4) increased political uncertainty: in addition to the US election on November 5th, the Japanese ruling party will elect a new leader on September 27th.

Goldman Sachs said in its recent research report that after the Bank of Japan's rate hike in July, economic data and inflation trends have basically met expectations.

Japan's second-quarter GDP grew by 0.8% sequentially, and wage increases have partially been transmitted to service prices.

Although the Bank of Japan's "hawks" stated that they would continue to raise interest rates if the data met expectations, Goldman Sachs believes that it takes time to confirm the rebound in inflation, and the "best" time for the Bank of Japan to raise interest rates again is still in January next year.

The bank continues to view the October price revision period as a turning point for Japan's inflation trend, when inflation will gradually rise with prices, and January next year is the best time to judge whether inflation has rebounded.

However, Goldman Sachs said that financial market volatility could change this timetable.

If the market performs smoothly and economic data is positive, the Bank of Japan may raise interest rates in December.

Bloomberg's survey also shows that 53% of analysts expect the Bank of Japan to raise interest rates in December.

Its analysis said that the Bank of Japan's rate hike in July led to a significant global market turmoil at the beginning of August, but this did not change the Bank of Japan's continuous pace of interest rate hikes.

Bank of America Merrill Lynch predicts that the Bank of Japan may raise interest rates again to 0.5% in January 2025, and further raise interest rates to 0.75% in the second half of next year.

Whether the Bank of Japan can gradually advance policy normalization depends on the outlook for the US economy.

The bank wrote: If the US economy has a soft landing and the Federal Reserve begins to gradually lower interest rates, this should not hinder the Bank of Japan from continuing to raise interest rates.

However, if the US labor market and economic activity data further deteriorate, it may trigger concerns about a recession, thereby prompting the Federal Reserve to accelerate interest rate cuts, which will reduce external demand and lead to a further strengthening of the yen, thereby increasing the downward risk of inflation and wage growth in the 2025 fiscal year.

In this case, the Bank of Japan is likely to suspend interest rate hikes and maintain the policy interest rate at 0.25%.

After the Federal Reserve cut interest rates by 50 basis points overnight, although the yen against the US dollar once rose by more than 1%, the increase narrowed due to Powell's hawkish remarks.

Bank of America Merrill Lynch believes that the yen is very sensitive to news from the Bank of Japan, but this meeting is unlikely to have a significant impact on the yen.

The bank expects the US dollar/yen to rise to 150 in the fourth quarter of 2024.

Considering that the Bank of Japan is still advancing policy normalization, Haruhiko Kuroda's positive remarks on future interest rate hikes at the press conference may support the yen.

However, we believe that the recent decline of the US dollar against the yen has been excessive, and we expect this currency pair to rise to 150 in the fourth quarter of 2024.

"What stock investors really care about before the next earnings season is the exchange rate issue," said Yoshitaka Suda, a cross-asset strategist at Nomura Securities.

The unexpected interest rate hike by the Bank of Japan in July led to a surge in the yen and a sharp drop in the stock market, and the market is highly sensitive to this.

Traders hope that this interest rate decision will bring a different market reaction.

As the yen against the US dollar has rebounded by 9.4% from the low point on July 10th, excessive yen appreciation may prompt the Bank of Japan to be more cautious when raising interest rates, especially with the LDP about to hold leadership elections.

Kohei Onishi, a senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities, pointed out that the impact of foreign exchange on Japanese stock market volatility may weaken.

He believes that the yen may gradually strengthen in the future, but the trend itself will become much more moderate.