Bank of Japan's conundrum seen deepening as pandemic drags on | The Japan  Times

Policymakers at the Bank of Japan are debating how soon they may begin hinting at an eventual interest rate hike, which could occur even before inflation reaches the bank's 2% objective, according to sources, who are emboldened by broader price gains and a more hawkish Federal Reserve.

While an actual rate hike is unlikely, and the BoJ is expected to retain ultra-easy policy for the rest of the year, financial markets may be underestimating the BoJ's willingness to gradually phase out its once-radical stimulus program.

Notably, the BoJ's carefully phrased commitments to keep monetary policy accommodative apply only to continually injecting cash into markets, not to maintaining existing low interest rates.

"The BoJ never committed to keeping rates on hold until inflation exceeded 2%," a source familiar with the BoJ's thinking said, a viewpoint shared by two other sources. "That means it can potentially hike rates before inflation sustainably exceeds the target."

The BoJ appears to be achieving what it wants after nine years of vigorous monetary easing. Inflation is creeping closer toward its elusive goal, and popular beliefs of continued deflation are evolving.

With the increase being driven by increased raw material prices rather than a hoped-for increase in domestic demand, the BoJ's immediate aim is to prevent a temporary blip in inflation from stoking market speculation of an early policy tightening.

Many BoJ policymakers do not expect conditions to be in place to warrant a rate hike this year, owing to uncertainties over whether consumption will improve sufficiently to allow firms to continue raising prices.