The Bank of Japan is widely expected to maintain ultralow rates at its first policy meeting of 2024 from Monday, opting to gauge the strength of wage growth and the economic and financial impact of a deadly earthquake that struck central Japan three weeks ago.
The BOJ is likely to maintain policy, with cost-push factors, mainly blamed for the recent surge in prices, fading and "shunto" wage negotiations between management and labor unions set to get under way this week.
In its economic and price outlook report due out Tuesday, the central bank is expected to downgrade its inflation forecast for fiscal 2024 from 2.8 percent projected earlier.
Japan's core consumer inflation rate remained above the BOJ's 2 percent target for the 21st month in December, keeping alive market expectations for a shift from the current ultraloose monetary policy framework, possibly this spring.
With the Policy Board likely to maintain short-term interest rates at minus 0.1 percent and continue allowing 10-year Japanese government bond yields to rise above 1.0 percent, financial markets are expected to scrutinize the central bank's assessment of wage growth.
Wage growth is a critical factor for achieving stable inflation and scaling back monetary stimulus.
Ending the negative rate policy, introduced in 2016, will be a major turning point for the dovish central bank, which has chosen to remain an outlier among major central banks that have scrambled to raise interest rates to fight surging inflation.
The external environment is also changing, with the U.S. Federal Reserve expected to start cutting rates later this year. The U.S. central bank will hold a two-day meeting next week.
BOJ board members have expressed growing confidence about the prospect of pay hikes since Japan saw its fastest wage growth in three decades last year, due largely to cost-push inflation. But there is still uncertainty over how far pay hikes will spread, with a recent BOJ survey pointing to a cautious stance among relatively smaller firms.
"If the BOJ ends the negative rate in January when the quake's economic impact is not clear and relief efforts are still ongoing, it will be perceived as being out of touch (with reality)," said Noriatsu Tanji, chief bond strategist at Mizuho Securities Co.
While the BOJ is not facing increased pressure to continue with monetary easing because of the quake, Tanji said he does not expect the negative rate to end in the foreseeable future as core-core inflation, which strips away energy and volatile fresh food items, is forecast to undershoot 2 percent around June.
"If we want to see whether wages are growing, the shunto results alone will not suffice. Their spillovers should also be monitored," he added.
Core-core CPI, which shows the underlying price trend, rose 3.7 percent in December from a year earlier, according to the Ministry of Internal Affairs and Communications.
BOJ Governor Kazuo Ueda has said the likelihood of the central bank achieving its inflation target has been "gradually rising," and the outcome of the wage talks will hold the key. Last year, Japanese companies agreed an average pay hike of 3.6 percent.
Japan's economy is likely to have rebounded in the October-December quarter after its first contraction in a year as rising prices for everyday goods dented private consumption. While inflation has been easing, the yen's weakness relative to the U.S. dollar will likely keep upward pressure on import costs in a blow to resource-scarce Japan.
