By Leika Kihara

TOKYO, Reuters – As rising prices force the Bank of Japan to concentrate on sustaining a fragile economic recovery, it will keep its ultra-low interest rate policy on Thursday.

While the BOJ has remained committed to its Zero-Rate Programme, this puts it in conflict with central banks who are moving towards tighter monetary policies. In Japan however, inflation is likely to rise to the central bank’s target of 2%.

However, rising inflation prompts the U.S. Federal Reserve to withdraw stimulus used during the COVID-19 Pandemic.

The yen has fallen to two-decades lows against USD due to the prospect of Fed tightening. This would increase the difference between U.S. interest rates and Japanese.

As some legislators worry further drops in the currency may do more harm to the economy than good, speculation has been rampant that the BOJ will allow longer-term rates rise or modify its policy guidance to fight yen declines.

However, with inflation still low compared to the rest of the world and an economy that is at or near pre-pandemic level, the BOJ does not want to change its pledge to lower rates or increase borrowing costs.

BOJ Governor Haruhikokuroda spoke in a Friday speech, stating that Japan has an output gap of negative. He also stated that Japan still needs to meet the stabilizing 2% target.

“The Bank’s role within the current context, is very clear. To continue to implement the current monetary easing that is centered on yield curve management.”

A two-day policy meeting concluded on Thursday. The BOJ is expected to keep its short-term target of -0.1%. It will also maintain the 10-year yield at around 0%.

The central bank will likely raise its inflation forecast for the current fiscal year, to close to 2%, in new quarterly forecasts that are due to be released after Thursday’s meeting. This is to reflect higher fuel prices.

However, the BOJ may reduce this year’s estimate of soft consumption growth and forecast that prices will decrease next year. It considers current cost push inflation to be temporary.

For clues as to when and if the BOJ will change its dovish policy guidelines, markets will pay attention to Kuroda’s post-meeting remarks.

The BOJ stated that it will not hesitate to make additional easing moves and expected short- and medium-term rates of policy to remain at the same or lower level under the current guidance.

Analysts believe that the BOJ may adjust its guidance towards a neutral position as soon as Thursday’s meeting.

Kuroda stated Friday that he didn’t see the need for stimulus to increase and said future policies would be data-dependent.

Analysts say that any changes in guidance won’t result in immediate tightening of monetary policy.

HiroshiUgai, JPMorgan Securities’ chief Japan economist (NYSE:) Securities), said, “We don’t expect the BOJ will adjust yield curve controls this time.” He also predicted that the central banking could alter the guidance for Thursday.