The Bank of Japan's monetary policy meeting commences today, with the following topics under scrutiny.

• The Bank of Japan's July monetary policy meeting begins on Tuesday, with the policy decision to be announced on Wednesday.
• The central bank's decision on interest rates and government bond purchases is the focal point for traders.

The Bank of Japan begins its July monetary policy meeting on Tuesday, with market participants closely watching its decision on interest rates and government bond purchases.

It is uncertain how much the Bank of Japan will increase its benchmark interest rate and reduce its purchases of Japanese government bonds.

Reuters polled economists who anticipate the BOJ will raise its benchmark interest rate to 0.1% from the current range of 0% to 0.1%. However, other experts predict even higher increases from the BOJ.

Last week, ING analysts predicted that interest rates could increase to 0.15%, while Bank of America forecasted that rates could reach a maximum of 0.25%.

'Virtuous cycle'

In June, BOJ Governor Kazuo Ueda stated that the central bank may increase rates based on the economic, price, and financial data and information available at the time, according to Reuters.

Ueda informed the parliament that our decision on tapering bond-buying and raising interest rates are separate matters.

Japan's headline inflation rate of 2.8% for June remained unchanged from May, while core inflation, excluding fresh food prices, increased to 2.6% from 2.5%. Despite this, the headline inflation rate has surpassed the Bank of Japan's (BOJ) target of 2% for more than two years.

The BOJ's key metric for price increases, the "core-core" inflation rate, increased from 2.1% to 2.2% and excludes prices of fresh food and energy.

Despite inflation consistently surpassing the BOJ's target rate, the central bank has remained focused on establishing a " virtuous cycle" where higher wages drive up prices.

The latest wage negotiations between workers' unions and companies have brought the virtuous cycle closer to reality, allowing the Bank of Japan to raise interest rates and normalize its monetary policy.

In July 3, the Japanese Trade Union Confederation (Rengo) announced that large corporations with over 300 union-supported employees had given their workers a 5.19% wage increase, while smaller companies had given their employees a 4.45% raise. This was the largest wage increase in 33 years, according to the union.

Bond taper

The BOJ's plan on how it will taper its bond buying program will be closely monitored during the upcoming meeting, as the bank announced in June that it would gradually reduce its purchase of JGBs to allow long-term interest rates to form more freely in financial markets.

The BOJ currently holds 579 trillion yen of JGBs, with the bank purchasing about $6 trillion yen ($39 billion) of JGBs per month, according to its March release and CNBC's calculations.

According to Reuters, citing unnamed sources, the BOJ is likely to gradually taper its bond purchases in several stages, with a pace roughly in line with dominant market views, to prevent an unwelcome spike in yields.