The Bank of Japan is expected to end negative interest rates at its monetary policy meeting next week, sources close to the matter said Friday, in what would be the first hike in 17 years and a major departure from years of unorthodox monetary easing.
The development reflects growing confidence among policymakers that a virtuous cycle of wage growth and price hikes is in motion, a requisite for the BOJ to normalize its policy as the outcome of this year's labor-management pay negotiations is expected to be the best in about three decades.
The BOJ is scheduled to hold a two-day policy meeting from Monday amid market expectations that the central bank will remove the negative rate, which has been in place since 2016.
BOJ chief Kazuo Ueda has said a review of the existing monetary easing framework, including the negative rate and yield cap program, will take place if the central bank's 2 percent inflation target, accompanied by wage growth, comes into view.
The BOJ has been keeping borrowing costs extremely low to support households and businesses and to stimulate the economy.
It has set short-term interest rates at minus 0.1 percent, effectively charging banks for parking some of their excess funds at the central bank.
While the country's inflation rate has remained elevated due largely to higher import costs, the BOJ has loosened its grip in recent months on long-term interest rates so that they better reflect economic conditions. The benchmark yield on 10-year Japanese government bond yields can now rise above 1.0 percent.
Even if the negative rate policy ends, however, Ueda has stressed that monetary conditions will remain accommodative, signaling that the BOJ will not rush to raise interest rates.
The BOJ will likely keep interest rates around zero percent, by guiding the overnight call rate, which is used by banks when they borrow and lend from each other, within a range of zero to 0.1 percent, according to the sources.
The BOJ's powerful monetary easing introduced during the time of Ueda's predecessor Haruhiko Kuroda formed a key pillar of the "Abenomics" economy-booster program, which lifted stocks and significantly weakened the yen.
As a result, the central bank's balance sheet has greatly expanded, and it currently owns about half of the outstanding Japanese government bonds after its aggressive purchases that it said were designed to achieve stable inflation.
The BOJ will likely continue with its bond buying to prevent a spike in long-term interest rates that would do harm to both businesses and households, but end its purchases of exchange-traded funds, the sources said.
BOJ policy makers have recently sounded more optimistic about the prospect of attaining 2 percent inflation, with board member Hajime Takata saying in late February that the goal is "finally in sight."
Major Japanese firms agreed to raise pay by an average of 5.28 percent, the fastest pace in 33 years, according to the first tally of the results from this year's "shunto" negotiations. It was announced Friday by Rengo, the umbrella group of Japanese trade unions.
Wage hikes are viewed as crucial by the BOJ as the recent bout of inflation, which has remained above 2 percent for nearly two years, has weighed on private consumption.
The government, for its part, has said Japan faces a "golden opportunity" to formally declare an end to deflation, or prices continuously falling, as Prime Minister Fumio Kishida steps up calls for Japanese firms that have booked robust profits to reward employees with higher wages.
The BOJ has been careful not to prematurely scale back monetary stimulus, swimming against a global tide of monetary tightening that saw the U.S. Federal Reserve and the European Central Bank rapidly raise interest rates to tamp down inflation.
The cautious stance has highlighted its lack of conviction that Japan can see stable inflation with the support of domestic demand, rather than temporary cost-push factors such as higher energy and raw material prices.
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