The Bank of Japan is widely expected to keep ultralow rates in the last policy-setting meeting chaired by Governor Haruhiko Kuroda from Thursday, capping his decade-long tenure that has been dotted with surprises.
Many analysts expect no changes to the central bank's yield curve control program, intended to support the economy with extremely low borrowing costs. But some are on guard against surprises, including scrapping the yield cap, before Kuroda hands over the reins next month.
The BOJ currently sets short-term interest rates at minus 0.1 percent while guiding long-term interest rates to around zero percent. It surprised financial markets in December when it widened the tolerance band for 10-year Japanese government bond yields to 0.5 percent from 0.25 percent, fueling market speculation of monetary tightening.
Kuroda has not budged over the need to maintain monetary easing to aid a tenuous economic recovery and enable companies to raise wages, a key factor in achieving the central bank's 2 percent inflation target. Inflation has been accelerating due largely to higher import prices, and the momentum will slow later this year, according to Kuroda, whose current term ends on April 8.
The regular two-day policy meeting comes before annual wage negotiations between management and labor unions culminate later this month, with major securities firms and think tanks projecting an average pay hike of around 3 percent. Among bellwethers, Toyota Motor Corp. has already decided to accept a pay hike demand in full from its labor union.
Koichi Fujishiro, a senior economist at the Dai-ichi Life Research Institute, expects the yield curve control program to be scrapped at the meeting, which may also come with a revision to the BOJ's forward guidance or a policy outlook.
"Wages are rising, and the country is not in a state of deflation. So the BOJ can say monetary easing is needed but not YCC," Fujishiro said. "I expect Mr. Kuroda will scrap YCC in March while leaving the difficult job of coming up with an exit strategy to his successor."
Parliamentary approval is expected this week for the government to formally appoint Kazuo Ueda, an academic and former BOJ board member, as the next BOJ chief, along with two deputy governors.
Ueda has told a confirmation hearing in parliament that the BOJ's monetary easing is "appropriate" but left the door open for reworking the current policy during his five-year tenure.
The BOJ's dovish stance contrasts with a hawkish U.S. Federal Reserve, which has carried out successive interest rate hikes to fight inflation, with the divergence in policies driving the yen's sharp decline against the U.S. dollar. Fed Chairman Jerome Powell indicated this week that interest rates would head higher than previously expected, depending on upcoming economic data.
BOJ watchers expecting no change this time say the central bank will need more time to examine the effect of the December decision to expand the 10-year yield trade band aimed at improving bond market functions, adding that it is unlikely to rock the boat before a leadership transition.
Masamichi Adachi, chief economist for Japan at UBS Securities, said he expects "no material policy change," noting that Kuroda's expected successor, Ueda, is in no hurry to change policy either based on his confirmation hearings.
"We do not deny the possibility of YCC adjustment given the surprise widening" in December as bond market function has continued to deteriorate. "However, we think the hurdle to widen the band is high."
