The Bank of Japan is widely expected to end its negative interest rate policy and overhaul its powerful monetary easing on Tuesday as robust wage growth boosts the likelihood of achieving its long-elusive goal of stable inflation.
Financial markets expect the BOJ to raise its policy interest rate, currently set at minus 0.1 percent, at the end of a two-day policy meeting in what would be the first hike in 17 years.
Among other policy tools, the BOJ is also seen by analysts as scrapping its yield cap program, under which borrowing costs have been kept artificially low through its buying of government bonds.
The BOJ is also expected to stop buying more exchange-traded funds, a practice that has made the central bank a target of criticism for its huge presence in the stock market.
The expected changes would mark a major departure from the powerful monetary easing that began about a decade ago and signal the beginning of policy normalization that analysts say will likely be slow at best amid uncertainty over the inflation outlook.
Heading into the latest policy meeting, BOJ board members have sounded more confident about the probability of achieving 2 percent inflation, supported by wage growth.
The preliminary reading of a 5.28 percent pay hike offered by major Japanese firms on average during this year's labor-management negotiations has apparently boosted hopes for a virtuous cycle of pay and price increases. The pace is the fastest in over three decades.
BOJ chief Kazuo Ueda has indicated that the negative rate and yield control program will be reviewed when the inflation goal comes into view. Still, he has shot down expectations that the central bank would raise rates rapidly, saying financial conditions will remain accommodative.
After the BOJ announces its latest policy decision, Ueda is scheduled to hold a press conference later in the day. The governor's remarks will be scrutinized for any clues as to future policy changes, which would also impact financial markets.
Despite market expectations that the negative rate will be removed, the yen remains weak against the U.S. dollar, partly because the gap in monetary policy between Japan and the United States remains wide.
The U.S. Federal Reserve is scheduled to hold a two-day policy-setting meeting starting Tuesday, and analysts expect it to end its aggressive monetary tightening to fight soaring inflation and start cutting rates sometime this year.
