The Bank of Japan is widely expected to maintain ultralow rates at its two-day policy meeting from Thursday and examine economic and financial market developments since the central bank made its yield cap program more flexible in July.
Financial markets will be watching for any hints of a future policy change, particularly when Governor Kazuo Ueda holds a post-meeting press conference, after his comments in a recent interview with a major Japanese newspaper boosted expectations that the BOJ will shift away from monetary easing sooner than previously expected.
Leading up to the Policy Board meeting, the benchmark yield on 10-year Japanese government bonds, targeted under the BOJ's yield curve control program, briefly jumped to 0.745 percent, the highest since 2013, while the yen has weakened toward 150 to the U.S. dollar, a level unseen since last year.
The BOJ's dovish stance has drawn a sharp contrast with the U.S. Federal Reserve, which left interest rates unchanged on Wednesday at the end of its policy-setting meeting. Still, another rate hike is expected by the end of this year, with Fed chief Jerome Powell saying there is still a long way to go in bringing down inflation to 2 percent.
The policy divergence has been a major factor behind the weakening of the yen.
Ueda told the Yomiuri Shimbun that ending the BOJ's negative rate policy introduced in 2016 would become an option if wages and prices rise.
He stuck to the view that monetary easing is still necessary with the BOJ's 2 percent inflation target yet to be achieved, but he suggested it could gather enough information and data by year-end on wage hikes to decide whether the negative rate policy should end.
The remarks came after the BOJ decided at its July meeting to allow 10-year yields to rise toward 1.0 percent, bracing for upside risks to inflation. Under its yield cap program, short-term interest rates are set at minus 0.1 percent and 10-year yields are guided around zero percent.
Japan's inflation rate has remained above 2 percent for over a year, largely due to surging import costs for energy and raw materials. This has complicated the BOJ's efforts to stick to monetary easing as consumers have had to pay more for everyday goods but the central bank forecasts consumer price inflation will slow and undershoot its target in coming months.
Among the nine-member Policy Board, there appears to be a mixture of confidence and skepticism regarding the inflation outlook. Naoki Tamura, a hawkish member, has said the 2 percent target "has come into view."
For its part, the Japanese government is expected to draw up fresh economic measures in October to cushion the negative impact of rising prices on inflation, at a time when global economic growth is projected to slow toward next year amid aggressive rate hikes in the United States and Europe, and a slowdown in China.