By Leika Kihara

TOKYO, Reuters – On Friday the Bank of Japan will keep monetary policy loose but could reduce emergency funding. This is less than 48 hours after U.S. Federal Reserve indicated an imminent end of stimulus to address rising global inflation.

Expected decision of the BOJ, supported by cautious optimism regarding economic healing from the coronavirus crisis, will bring it into line with central banks’ plans to end crisis-mode policies.

Japan will likely reduce its economic aid at a slower rate than other countries, as consumer inflation is still well below the 2% mark.

Slow wage growth coupled with soft consumption that has shackled inflation to close to 0% makes Governor Haruhikokuroda likely to assure markets the BOJ won’t lag behind major counterparts when it comes to turning off the money tap and raising interest rates.

Mari Iwashita is chief market economist for Daiwa Securities. “If more firms start to pass rising costs on to households, core consumer inflation might exceed 1.5% sometime next-year,” she said.

This may prompt the BOJ’s next-year normalisation of policy to begin dropping hint. However, actual execution is still some way off,” she stated.

The BOJ will likely keep its target rate for short-term rates at -0.1%, and the 10-year yields at around 0% during a rate review that ends Friday. A debate will ensue about whether the BOJ should prolong the March 2022 deadline for urgent funding, which was established last year to counter a cash crunch triggered by pandemics.

Sources told Reuters that the BOJ might reduce its purchases of commercial paper and corporate bond due to dramatic improvements in financing conditions at large companies.

Sources said that another funding program for smaller businesses may also be cut back. However, a part of the scheme could still be extended past March in order to continue supporting cash-strapped retail customers.

Markets focus on Kuroda’s comments about the inflation outlook. They also consider how Kuroda’s message of three rate rises in the Federal Reserve next year might impact the BOJ’s policy.

Contrary to the alarmingly high inflation in other economies, Japan’s core consumer price index rose 0.1% in October compared with a year ago. This is because firms are cautious about raising prices in an environment of weak household spending.

Kuroda said Wednesday to parliament that consumers may experience inflation of 2% as a result of rising raw material prices. He stressed however the BOJ’s determination to keep its policy loose to ensure higher wages are accompanied any increase in price growth.