The Bank of Japan is widely expected to maintain ultralow interest rates at a two-day policy meeting starting Monday, with board members set to assess whether the price and wage hike cycle is on track to deliver the central bank's 2 percent inflation target sustainably.
Financial markets are looking for clues as to when the BOJ will move toward normalizing monetary policy by ending negative rates and scrapping its yield curve control program that keeps borrowing costs depressed at rock-bottom levels.
The BOJ currently sets short-term interest rates at minus 0.1 percent while guiding 10-year Japanese government bond yields to around zero percent. In the previous policy meeting in October, the Policy Board maintained that overall framework but decided to allow 10-year yields to rise above the previously rigid 1.0 percent ceiling.
Governor Kazuo Ueda told a parliamentary session prior to the last policy meeting of 2023 that the coming year will be "more challenging," prompting market players to interpret that as a sign that the BOJ is moving toward an exit sooner than previously thought, sending the yen surging versus the U.S. dollar.
As BOJ watchers expect the central bank to end its negative rate policy in 2024, the focus is how it sees the possibility of attaining its inflation target "stably and sustainably" amid growing expectations that companies, which have been passing on higher costs to consumers, will maintain the pay hike trend in annual negotiations with labor unions next spring.
The yen has bounced back moderately against the dollar, but import costs for resource-poor Japan remain bloated and inflation relatively high. Core consumer prices, excluding volatile fresh food items, jumped 4.2 percent in January but they have since eased, with the key gauge of inflation up 2.9 percent in October, still above the BOJ's target.
The BOJ remains an outlier among the central banks of major economies, having shot down expectations of immediate monetary tightening. After a spate of rate hikes to clamp down on inflation, the U.S. Federal Reserve is now seen as heading toward interest rate cuts next year while the European Central Bank and the Bank of England held off on hikes last week.
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