The Bank of Japan is widely expected to maintain ultralow rates at a two-day policy meeting starting Monday despite inflation hitting a four-decade high as companies pass on increased costs to consumers.
The meeting, the first of the three left in Governor Haruhiko Kuroda's term, comes after government sources told Kyodo News that the administration of Prime Minister Fumio Kishida is planning to revise a decade-old accord with the BOJ, with details likely to be worked out with whoever succeeds Kuroda when he steps down in April.
The joint statement issued in 2013 states that the central bank will aim to attain its 2 percent inflation target "at the earliest possible time." The envisaged revision would make the target more flexible, while retaining the goal itself.
Kuroda has made it clear that the BOJ's ultralow rate policy is necessary to support the still fragile economic recovery as rising commodity prices are adding downward pressure. More robust wage growth is a requisite for the 2 percent target to be attained in a sustainable fashion and thus a near-term rate hike is not an option.
Keeping to its dovish stance, the Japanese central bank is widely expected to continue setting short-term interest rates at minus 0.1 percent while guiding 10-year Japanese government bonds to around zero percent.
Under the so-called yield curve control program, it has been desperately defending the 0.25 percent upper limit for the benchmark yield by offering to buy unlimited amounts of 10-year bonds even when overseas yields have been trending higher.
The BOJ faces greater pressure from Japanese households that are already feeling the pain of rising prices, partly due to the central bank's commitment to its ultralow rates that has weakened the yen and boosted import costs.
The U.S. Federal Reserve made a 0.5 percentage point rate hike last week, smaller than the four 0.75 point increases seen previously, but indicated more hikes are forthcoming as the world's largest economy may be headed toward a recession.
The dollar is trading below the 140 yen line, still higher than the assumed exchange rate of 130.75 yen set by Japanese firms for the fiscal year to next March.
The yen has borne the brunt of the policy divergence with the Fed this year, prompting Japanese authorities to intervene several times to stop the currency's rapid slide.
Such intense yen-selling pressure has eased but its aftereffects continue to linger, with a growing list of companies raising retail prices to pass on higher import costs, mainly of energy, raw materials and food items, amplified by the yen's weakness.
Despite the weaker yen boosting the overseas profits of exporters, Japanese firms also worry about the impact of higher input costs on profits.
The most recent Tankan business confidence survey released ahead of the policy meeting showed Japanese firms expect prices to rise 2.0 percent or more a year from now, three years and five years ahead.
Economists expect the world's third-largest economy likely rebounded in the three months to December from an unexpected contraction in the previous quarter but aggressive rate hikes overseas and slowing growth in China, a major trading partner for Japan, are clouding the outlook.
