New Bank of Japan Governor Kazuo Ueda is widely expected to shun surprises at a two-day policy-setting meeting from Thursday, his first since assuming the post, even amid persisting speculation that an overhaul of the central bank's controversial yield cap program will come sooner rather than later.
Ueda's remarks in the lead-up to the meeting have suggested that the central bank under his leadership will remain committed to monetary easing and controlling short-term and long-term interest rates at a time of budding inflation expectations.
Financial markets are looking for hints as to how confident he is about the prospect of attaining the BOJ's 2 percent inflation target stably along with strong wage growth that would warrant an eventual shift to policy normalization.
The BOJ is scheduled to release its inflation forecast for fiscal 2025 for the first time, and it is widely expected to show core consumer prices excluding volatile fresh food items gaining around 2 percent from a year earlier.
The key inflation gauge is now projected to increase 1.6 percent in the current fiscal year and then 1.8 percent in fiscal 2024.
Japan's recent bout of inflation, already above the 2 percent goal for a full year, means the BOJ has its work cut out to persist with ultralow rates.
The BOJ has consistently argued that temporary cost-push factors are to blame. But consumers are already feeling the pinch of rising prices of everyday goods that will likely continue in the coming months.
Ueda, a renowned monetary policy expert and former BOJ board member, maintains that inflation will slow and undershoot 2 percent later this year and that therefore monetary easing should remain in place. Still, he has acknowledged the difficulty of a policy response when inflation is driven by higher costs rather than strong demand.
"Generally speaking, (central banks) would want to curb it when the inflation rate is rising. That said, you do not want to tighten policy, considering the negative impact of cost-push inflation on the economy," Ueda told a parliamentary session on Wednesday. "It's extremely difficult to decide where to stand to keep a balance."
The BOJ is expected to set short-term interest rates at minus 0.1 percent while guiding 10-year Japanese government bond yields to around zero percent.
Many BOJ watchers say the central bank will likely maintain its policy guidance, which states that it expects short- and long-term rates to be at "present or lower levels," while it would be able to drop its reference to the impact of COVID-19 as Japan emerges from the fallout.
The yen has borne the brunt of the BOJ's dovish stance, which has so far has shown little sign of change under the new governor.
The U.S. Federal Reserve and European Central Bank, both in rate hike cycles, are scheduled to hold policy-setting meetings next week amid worries about the banking sector and economic growth.
"We will likely see an overhaul of the yield curve control program to address its side-effects but not this time," said Toru Suehiro, chief economist at Daiwa Securities, adding that the BOJ will likely wait until its June meeting to change its forward guidance.
"For now, Mr. Ueda would rather want to avoid committing to anything that would limit room for future policy maneuver."
