The Bank of Japan stays put, providing support to the soaring global stock markets.

Some investment institutions consider the Bank of Japan, the initiator of the global stock market crash in August known as "Black Monday," decided to maintain the status quo on Fridaykeeping Japan's basic interest rate and its monetary policy stable. This further indicates that after scaring investors with an unexpected rate hike and hawkish views in July, the central bank believes there is no rush to hike rates and emphasizes that it is monitoring financial markets. After the unexpected 50 basis point rate cut by the Federal Reserve kickstarted a rate-cutting cycle, global stock markets surged under the expectation of Fed easing. The Bank of Japan's decision to maintain its stance, along with the implication that it won't rush to tighten monetary policy after the July rate hike, undoubtedly provided a strong boost to global stock markets. The immediate reaction in the forex market was relatively subdued, with the yen showing minimal volatility, but global stock markets continued to rebound. The Japanese stock market continued to rise significantly, while the Japanese government bond yields remained stable. Overall, after the chaos caused by the rate hike announcement in July and the subsequent global stock market crash, the Bank of Japan's decision to keep the unsecured overnight call rate at around 0.25% in its September policy meeting aligns well with economists' expectations. Furthermore, the Bank of Japan raised its assessment of Japanese consumer spending, which is a key engine of economic growth in Japan, and highlighted the need to monitor global financial markets. The Bank of Japan reiterated its forecast that price growth will align with its target later in the forecast period, indicating that the bank is still on the path to raising rates. However, the members of the Bank of Japan may adjust their pace based on the financial market situation following "Black Monday." The culprit behind the global stock market's "Black Monday": Forced large-scale liquidation of arbitrage trades Due to the tightening of monetary policy by the Bank of Japan at the end of July, which seemed to trigger a historic crash in the Japanese stock market and led to global market turmoil, the central bank has recently faced significant market pressure. The Japanese stock market led the global market crash in August's "Black Monday," mainly due to the unexpected rise in U.S. unemployment rate exacerbating fears of economic recession, the hawkish rate hike by the Bank of Japan pushing the yen exchange rate higher, prompting rapid liquidation of arbitrage trades, and investors' concerns that further rate hikes by the Bank of Japan could harm Japan's fragile economic recovery and the yen's appreciation, which in turn led to a significant drop in the Japanese stock market with multiple circuit breakers triggered, causing a global stock market meltdown. The accelerated appreciation of the yen prompted traders to swiftly unwind their favored yen-financed arbitrage trade positions, leading to some traders having to sell large amounts of highly liquid stocks like Japanese stocks and U.S. tech stocks that had reached record highs to offset the massive losses incurred from borrowing yen, causing the entire financial market to spiral into a vicious cycle of selling risk assets on Monday. Therefore, when the yen appreciates rapidly, the risk of this arbitrage trade significantly increases. As traders borrowed yen, if the yen appreciates, leveraged forex traders must buy back yen at higher prices to repay the loan, often leading to a substantial decrease in their actual returns and potentially significant losses. The prospect of rate hikes by the Bank of Japan remains difficult to shake, but the pace of policy may be slower On July 31, Bank of Japan Governor Kuroda Kuroda clearly expressed a hawkish tilt towards rate hikes, which was believed to trigger the global market turmoil in early August. Subsequently, members of the Bank of Japan quickly released dovish remarks to alleviate the market's expectations of rate hikes. While the members of the Bank of Japan's Policy Board have indicated their firm intention to hike rates in normalizing monetary policy as data allows, they have also emphasized the necessity of temporarily monitoring financial markets and their impact on the global economy. "If the outlook report in October shows the Bank of Japan moving towards its price stability target and the global financial environment stabilizes, they will still plan to hike rates then or in December," said Toru Suehiro, chief economist at Daiwa Securities. "Kuroda Kuroda will reiterate the same neutral stance at the press conference, choosing to raise rates if the price outlook materializes." Market pricing indicates that investors are not as confident as economists that the Bank of Japan will take action before the end of the year. Overnight index swaps show only a 33% chance of a 25 basis point rate increase by the Bank of Japan this year. The Bank of Japan mentioned in its policy statement that it will continue to raise policy rates if economic and financial activity outlooks materialize. The bank used this phrase when explaining its rate hike decision and policy direction in July. The bank also stated that medium to long-term inflation expectations may rise. "Kuroda Kuroda may weigh two main factors - the risks of a hawkish Bank of Japan causing massive market turmoil and the increasing confidence in the 2% inflation target supported by recent wage and price data. Our basic view is that Kuroda Kuroda will send a subtle signal indicating that if all conditions are right, the Bank of Japan will be prepared to hike rates in October," said Bloomberg Economics economist Taro Kimura. Following the long-awaited policy shift by the Federal Reserve and a significant rate cut, the Bank of Japan's Policy Board commenced a two-day meeting. During this process, the Federal Reserve joined developed market peers including the Bank of England and the European Central Bank in cutting rates, initiating a cycle of loose monetary policy. This process highlights the Bank of Japan's unique position as the only major central bank on a tightening rate trajectory, suggesting that the logic of the Japanese stock market may differ from the mainstream developed markets' loose logic and implying that the yen may become the best-performing sovereign currency among the G10 in the coming year. "I believe the timing of the next rate hike will depend on the future economic conditions, especially those of the U.S., in the coming months," said Chotaro Morita, Chief Strategist at All Nippon Asset Management. "I think this significantly delays the Bank of Japan's policy decisions." As the Federal Reserve strengthened the momentum of global easing movement on Wednesday, the Bank of Japan's two-day meeting opened. In this process, the Federal Reserve joined developed market peers including the Bank of England and the European Central Bank in cutting rates, initiating a cycle of loose monetary policy. This process highlights the Bank of Japan's unique position as the only major central bank on a tightening rate trajectory, suggesting that the logic of the Japanese stock market may differ from the mainstream developed markets' loose logic and implying that the yen may become the best-performing sovereign currency among the G10 in the coming year.There are discrepancies among experts regarding the expected policy development trajectory in Japan.The impact of the financial markets on the Japanese economy is still to be observed. At the same time, recent economic data in the past few weeks has provided encouraging signs, indicating that the Bank of Japan will raise interest rates on a larger scale based on stable inflation according to CKH HOLDINGS. This explains why 53% of economists believe there is a risk of a rate adjustment at the next meeting in October. After the Liberal Democratic Party of Japan elects a new leader on September 27, Japan will see a new Prime Minister in the coming weeks. The party's dominant position in parliament almost ensures that its leader will be appointed as the Prime Minister within days of a party approval poll. According to sources, the Bank of Japan board members expect the new leader not to push for drastic changes in monetary policy, as the ruling party supports the central bank in pursuing its stable inflation target.