The Bank of Japan is widely expected to maintain ultralow interest rates at a two-day policy meeting from Thursday, as uncertainty looms over prospects for inflation, wage growth and monetary tightening overseas.
Prior to his second policy meeting since becoming governor in April, Kazuo Ueda pointed to upside risks to inflation due to recent changes in corporate price-setting behavior. But he reiterated the need to persist with monetary easing because there is "some distance" to achieving its 2 percent inflation target stably.
The Japanese central bank is expected to retain its yield curve control program, under which short-term interest rates are set at minus 0.1 percent while 10-year government bond yields are guided to around zero percent.
Wage negotiations this year between labor unions and management have seen the biggest hikes in about three decades, boding well for the BOJ's efforts to achieve price stability accompanied by rising wages.
The central bank added a specific reference to the need for robust wage growth in its policy guidance unveiled after the first meeting under Ueda in late April.
Japan's inflation rate, as measured by the closely watched core consumer price index, has remained above 2 percent for a year. But the BOJ has not budged in its view that most of the recent price increases can be attributed to rising import costs of energy and raw materials and expects such upward momentum to weaken.
The negative aspects of accelerating inflation have already become evident. The rising prices of a variety of everyday goods have dented consumer sentiment, with pay growth not keeping pace. Real wages fell 3.0 percent in April from a year earlier for the 13th straight month of decline.
Prime Minister Fumio Kishida, who wants to see a virtuous cycle of growth and wealth redistribution, has been calling for companies to raise wages. In a policy blueprint to be finalized on Friday, his government seeks to facilitate switching jobs in search of better working conditions. Japan has been long known for lifetime employment, but critics say the system has made wage growth tepid.
The BOJ's persistence with monetary easing looks set to widen its policy divergence with its U.S. and European peers. The U.S. Federal Reserve remains hawkish despite holding off on another interest rate hike on Wednesday, and the European Central Bank is widely expected to go ahead with another 0.25 percentage point hike on Thursday.
The global economy is forecast to achieve modest growth this year. The Organization for Economic Cooperation and Development warned earlier this month that inflation could prove more entrenched than previously thought, which would then require further monetary policy tightening.
The BOJ has said the economy "has picked up" despite negative factors such as higher commodity prices. Economists expect pent-up demand, particularly for services, to continue underpinning the world's third-largest economy even when overseas demand weakens following aggressive rate hikes by the likes of the Fed and the ECB.
