TOKYO (Reuters) – The Bank of Japan may leave its policy of yield curve control unchanged at its meeting next week, five sources familiar with its thoughts say, with members of the central bank’s governing council preferring to ensure wages and inflation keep rising.

But there is no consensus within the central bank on when the support measures would end, making next week’s decision uncertain.

With inflation having exceeded the BOJ’s target for more than a year, markets are speculating that the central bank may change its curve control policy (CCP) as soon as the July 27-28 meeting.

Some market participants are betting on a widening of the target yield band, in order to end the market distortions caused by its massive bond purchases.

With the 10-year yield trading below the target yield of 0.5%, many BOJ members see no reason to take further action against the side effects of the CCP, the sources said.

Policymakers say the BOJ can afford to wait for more clarity on the trajectory of the global economy, while allowing Japanese companies to reap enough profits to continue raising wages next year, they said.

Despite sovereign and yen volatility, the BOJ is unlikely to change its monetary policy next week, the sources added.

“Inflation is accelerating more than expected, but the question is whether this rise is sustainable, which will largely depend on corporate earnings and wage prospects for next year,” one of the sources said.

“The PCC has to end at some point, but the time is probably not right,” another source said.

“There are signs of a shift in Japan’s deflationary mentality, but it’s still a sentiment rather than anything substantial.”

Even if the BOJ were to make adjustments, it would likely be a minor tweak to make the PCC more viable, a third source said.

INFLATION OUTLOOK REMAINS UNCHANGED

In new quarterly projections due after the meeting, the central bank is likely to revise upwards its core inflation forecast for the year that started in April, the sources said.

But forecasts for fiscal years 2024 and 2025 are expected to remain virtually unchanged from current projections, they said.

According to current forecasts made in April, the BOJ expects core inflation to reach 1.8% this fiscal year and accelerate to 2.0% next year, before slowing to 1.6% in 2025.

Core inflation, which excludes volatile fresh food and energy prices, would reach 2.5% this year, 1.7% the following year and 1.8% in 2025, according to April projections by the BOJ.

Under the PCC, the BOJ sets short-term interest rates at -0.1% and the yield on 10-year bonds at around 0%.

However, the yield may fluctuate around the target yield, a range widened in December to 50 basis points.

Changing the yield band or not would depend on the cost-benefit ratio of PCC, the sources said.

“We expect the BOJ to leave key monetary policy levers unchanged next week,” said Stefan Angrick, chief economist at Moody’s Analytics.

“Regardless of whether the BOJ adjusts its PCC or not, a rate hike remains a long way off.”

More than three-quarters of economists polled by Reuters said they expected the BOJ to keep monetary policy unchanged, including its PCC, next week.

(Report Leika Kihara, Takahiko Wada, Corentin Chapron, edited by Kate Entringer)

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