Fed FOMC and BOJ Meetings Take Center Stage — Stock Market Risks Loom Even If Rate Hikes Are Skipped: Weekly Market Outlook

This week’s financial markets are likely to search for direction around two central bank events: the U.S. Federal Open Market Committee (FOMC) meeting and the Bank of Japan’s monetary policy decision meeting. The Nikkei Stock Average shed nearly 1,000 points last week, while South Korea’s KOSPI gave back a portion of its gains heading into the weekend, as escalating Middle East tensions and rising interest rate pressure in both Japan and the U.S. cooled investor sentiment. Among market participants, some are pointing out that even if the Federal Reserve Board (FRB) holds rates steady, it may not provide support for stock prices.

Shingo Ide of NLI Research Institute attributed last week’s stock declines to escalating Middle East tensions, rising interest rates in Japan and the U.S., and heightened expectations for rate hikes. What he is particularly wary of is how the market would react if the FOMC opts to hold rates steady. With President Trump demanding rate cuts, if the Fed refrains from hiking, the market could interpret the decision as the central bank bowing to presidential pressure, raising doubts about the central bank’s independence. He suggested that investors should be prepared for a scenario in which stocks fall despite a rate-hike pause.

The FOMC meeting kicks off on the 15th U.S. Eastern Time. In the Korean market, attention is focused less on the benchmark rate decision itself and more on the dot plot indicating the future rate path and remarks from FRB Chair Kevin Warsh. The U.S. August Consumer Price Index (CPI) rose 3.4% year-over-year, matching market expectations, while core CPI rose 2.4% year-over-year. While the figures did not deviate significantly from market forecasts, some analysts note that they do not completely rule out the possibility of additional Fed rate hikes.

With international crude oil prices surpassing $100 per barrel (approximately ¥15,000) amid Middle East geopolitical risks and U.S. long-term yields approaching 5%, appetite for risk assets remains subdued. In South Korea, institutional investors net purchased ₩3.4826 trillion (approximately $2.6 billion) worth of stocks on the main exchange, supporting the index, while foreign investors net sold ₩2.119 trillion (approximately $1.6 billion).

In Japan, the Bank of Japan’s monetary policy meeting begins on the 17th, with growing expectations that the policy rate will be raised. Ide noted that if the outcome matches market expectations, extreme downward pressure on stock prices could be avoided, but added that attention will focus on how aggressively Governor Kazuo Ueda signals his stance on future rate hikes.

The BOJ’s monetary policy affects not only Japanese markets but also global capital flows. If a rate hike is actually implemented, yen appreciation and rising Japanese government bond yields could ripple through global bond markets, and combined with concerns over the unwinding of yen carry trades, could deliver a short-term shock to Asian markets including South Korea.

On the other hand, growth expectations for the artificial intelligence (AI) industry are functioning as a buffer for equity markets. Expectations are strengthening that improved performance of next-generation AI models will expand the scope of AI applications, reigniting investment appetite for related infrastructure such as semiconductors and data centers. The KOSPI’s temporary recovery above the 7,000 level last week, despite upward pressure on interest rates, is seen as a reflection of these expectations.

From a valuation standpoint, the KOSPI’s 12-month forward P/E remains at low levels despite improving earnings forecasts, and analysts suggest that rotational buying may continue in sectors that appear undervalued relative to earnings, particularly semiconductors. NH Investment & Securities set this week’s expected KOSPI range at 6,400–7,400. While market participants are placing weight on the possibility of heightened short-term volatility around the FOMC and BOJ meetings, there are views that once the monetary policy events pass and uncertainty subsides, earnings improvement and expanding AI investment will re-emerge as central themes for equity markets.

Last week, the KOSPI closed up 3.33% week-over-week at 6,909.91, marking its first weekly gain in four weeks. The KOSDAQ also rose 0.88%. Midweek, the index reclaimed the 7,000 level on a closing basis for the first time in about a month and a half, driven by strength in semiconductor stocks, but declined for two consecutive days in the latter half of the week, giving back a portion of its gains. On the 14th, the KOSPI opened at 6,692.61, down 217.30 points (3.14%) from the previous trading day.

Investors will be forced to trade cautiously this week as they weigh two key factors: the direction of U.S. monetary policy and the BOJ’s stance on rate hikes. The trajectory of Middle East tensions is also expected to continue influencing market sentiment through crude oil prices, and high volatility is likely to persist in the short term.