The Bank of Japan is expected to raise its interest rate cap to around 0.25% during the meeting on July 30-31, according to Greg Hirt, Chief Investment Officer of Allianz Investment Global Multi-Asset. Although the Bank of Japan has not provided a clear guidance on the rate hike, the market may be surprised. The decision to hike is becoming more complicated due to external factors such as a possible slowdown in the U.S. economy. The Bank of Japan is aiming to exit the zero interest rate range before making its decision to hike. Bank of Japan Governor Haruhiko Kuroda has previously indicated a preference to not maintain the policy rate target between 0% and 0.1% for an extended period. Given the current inflation level and severely negative real interest rates, the market should be able to digest this rate hike. While there are concerns that a rate increase may have a negative impact on consumption, stabilizing the yen and preventing further depreciation is crucial for consumer confidence and market sentiment. A rate hike will help stabilize the yen at its current level, while not hiking could trigger carry trade unwinding and lead to a new round of selling pressure. Greg Hirt states that as the Bank of Japan continues on its path towards monetary policy normalization, the next challenge is how to demonstrate through policy that the Japanese economy has normalized, facing inflation and wage pressure, without slowing economic growth too early through aggressive policy actions. Current economic data is mixed, with economic growth slowing down on one hand and weak private consumption, while wage growth is accelerating and inflation expectations are increasing on the other hand. Given the relatively stable global and domestic growth outlook, the Bank of Japan is expected to seize this opportunity to accelerate the normalization of monetary policy at the July meeting. Additionally, it is expected that the Bank of Japan will reduce bond purchases. The Bank of Japan has communicated this thoroughly and recently discussed with major bond market participants to gather their feedback. The Bank of Japan is expected to closely align with market expectations to avoid unnecessary market disruptions. Aspects the market needs to pay attention to include the timeline, scale of the reduction and how the Bank of Japan will distribute the reduction across different sections of the yield curve. Allianz Investment predicts that the Bank of Japan will fully disclose its future timeline for reducing bond purchases to prevent market disturbance, with the possibility of outlining a plan for the next two years. The expected reduction amount will be substantial to encourage buyers who have been hesitant due to uncertainty about the reduction. Bond purchases may decrease by 3-4 trillion yen per month over the next two years. As for the distribution along the curve, although not explicitly stated, it can be inferred that the reduction will focus on areas where bond purchases were most intense before, such as the 3-5 year and 5-10 year range. With the expected timeline for reducing bond purchases, the Bank of Japan is gradually achieving its goal of exiting the bond market. Although the Bank of Japan will continue to play an important role, its exit from ultra-loose monetary policy is unlikely to be a medium-term catalyst for rising yields. Allianz Investment maintains a cautious view on Japanese government bonds but believes that the current prices largely reflect the upcoming changes, so it may adjust its position in Japanese government bonds to neutral in the short term. Due to long-term structural factors in Japan and global growth support, the outlook for Japanese stocks remains positive. As for the yen, a neutral stance is currently adopted. The recent strength of the yen sends a positive signal, but whether the yen can appreciate significantly remains a challenge until there is more evidence of a slowdown in the U.S. economy. If there are no catalysts for yen appreciation in the short term, the high funding costs of buying or holding yen may become expensive. In addition, the situation in the United States seems to be changing, and the next Federal Reserve meeting may provide more information on policy direction, so close attention will be paid to the situation.