The Bank of Japan is widely expected to maintain ultralow rates at the end of its two-day policy meeting from Thursday, even as its yen-weakening effect and surging import costs have come under greater scrutiny.
The Japanese central bank has been going against the policy-tightening trend in major economies. It maintains that the recent bout of inflation, driven by higher commodity prices, will not last, and its 2 percent inflation target can only be achieved stably with more robust wage growth.
The BOJ will likely make no change to its yield curve control program, under which it sets short-term interest rates at minus 0.1 percent while guiding 10-year Japanese government bond yields around zero percent.
The policy meeting comes after the yen's rapid depreciation, especially versus the U.S. dollar, prompted Japanese authorities on multiple occasions to intervene and arrest the downtrend that has seen the Japanese currency plunge to its lowest levels in over three decades.
In its new economic and price outlook report due out Friday, the BOJ will likely revise upward its inflation forecasts for the current fiscal year to next March while cutting its growth outlook for the same period, sources familiar with the matter said earlier.
The current projections are for the core consumer price index, excluding volatile fresh food, to gain 2.3 percent and for gross domestic parodic to expand 2.4 percent.
Uncertainty remains over how markets may react to the outcome of the policy meeting, though Governor Haruhiko Kuroda has already rejected the idea of raising interest rates in the near term and emphasized that the BOJ does not guide policy to control foreign exchange rates.
The BOJ's seemingly unshakable dovish stance compared with the U.S. Federal Reserve and the European Central Bank, among others, is behind the weaker yen, which in turn has inflated the import prices of energy, raw materials and food.
Analysts expect yen weakness to persist unless the monetary policies of Japan and the United States start to converge rather than diverge. But rapid and volatile yen moves would raise the risk of another yen-buying, dollar-selling intervention by Japanese authorities.
A strong dollar is seen as favorable for the administration of U.S. President Joe Biden and the world's largest economy hit by soaring inflation.
On Wednesday, Japan's top currency diplomat Masato Kanda dismissed speculation of bilateral discord over currency policy after U.S. Treasury Secretary Janet Yellen reportedly said she was unaware of any intervention that Japan had done or indicated it had done.
Kuroda's comments on the yen and the BOJ's policy will be scrutinized when he holds a post-meeting press conference on Friday. The BOJ chief has taken the view that a weak yen has both positives and negatives but that rapid, one-sided moves are a minus for the economy.
Japan's economy has been recovering, aided by the lifting of anti-coronavirus curbs that had weighed on economic activity. But higher commodity prices have been adding downward pressure on the resource-scarce economy, and therefore monetary easing is necessary to support it, Kuroda said ahead of the policy meeting.
Core CPI jumped 3.0 percent in September, the fastest gain in about 30 years without the special effects of consumption tax hikes. The headline figure is expected to rise further, hurting household sentiment.
The government is set to draw up a comprehensive economic package on Friday to help struggling households and consumers.
