The Bank of Japan (BOJ) rejected market pressure this week, maintaining ultra-low interest rates, but its bullish views on wages and growing strains from its policy suggest it may still end its expansionist experiment this year.

Even unremittingly dovish BOJ Governor Haruhiko Kuroda is talking up wage increases in Japan, a factor critical to raising rates after decades of trying to stoke inflation and growth, suggesting to some that the BOJ could change policy after he leaves office in April.

Bond investors have sought in recent days to break the BOJ’s cap on the key 10-year yield, but the BOJ stood pat on Wednesday on its policy of yield curve control (YCC), which applies a negative rate to some short-term funds parked at the central bank and targets the 10-year yield in a range around zero.

Kuroda said the BOJ expects wages to rise at “quite a fast pace” unseen in the past, a sign of the self-sustaining cycle the central bank and government have sought, in which rising economic growth pushes up inflation and people’s income.

The BOJ’s decision to introduce new tools to defend its yield cap also suggests YCC is nearing an end and could require an overhaul of the policy, analysts say.

Kuroda likely put YCC on life support so his successor can strategise an orderly exit, said former BOJ official Nobuyasu Atago.

“For the BOJ, the top priority now is to smoothly hand the baton to the new leadership,” said Atago, chief economist at Ichiyoshi Securities.

“Once the new governor settles in, it will overhaul YCC fairly soon,” said Atago. “The BOJ can’t keep on manipulating markets like this. At some point, it needs to let market forces drive yields.”

EYING THE EXIT

The next test will likely come on April 28, the first BOJ decision under Kuroda’s successor, when the bank will announce inflation forecasts extending into early 2026.

Companies and unions will have held their annual wage talks by then. Together with upbeat price forecasts, that could give the BOJ justification to phase out stimulus.

“Mr. Kuroda argues that the BOJ hasn’t started moving toward the exit. But the BOJ has already put its shoes and coat on,” ready to proceed towards ending YCC, Columbia University professor Takatoshi Ito, a longtime close associate of Kuroda, told Reuters.

“The BOJ just needs some more time to make sure wages will indeed rise before pulling the trigger,” said Ito, considered a contender for a top BOJ job. He said the bank could raise the 0.5% yield cap to as high as 1% around mid-year and ditch negative rates by year’s end.

Already, there are signs of change in Japan’s decades-long era of stagnant wage growth. The parent of casual clothing giant Uniqlo says it will raise wages as much as 40%.

A Reuters poll on Thursday showed more than half of big Japanese firms plan to raise wages this year, although the smaller firms that employ the vast majority of Japanese workers are less able to afford pay raises.

BOJ policymakers are already bracing for a possible near-term tweak to YCC, minutes of recent meetings show, with inflation on track to exceed the BOJ’s 2% target for a ninth straight month.

Kuroda told parliament in November the BOJ can head toward policy normalization when achievement of its inflation target, accompanied by wage increases, comes into sight.

BANKS BRACE

Japan’s mega-banks are also preparing for lift-off.

Mizuho Financial Group has closed almost all the positions in its Japanese government bond portfolio, assuming the BOJ will eventually phase out stimulus, president Masahiro Kihara told Reuters this month.

“If the BOJ ends negative rates, that would widen the spread between deposit and lending rates so would definitely be positive for us,” he said.

A natural first step in exiting YCC would be to first raise or remove the 10-year yield target, then push its short-term rate target above zero and mop up liquidity from the market, say sources familiar with BOJ thinking.

With YCC creaking under market pressure, the BOJ may not be able to wait too long.

“Because the BOJ is capping the 10-year yield at a level no one in the market sees as appropriate, it’s hard to trade bonds or to use them for arbitrage,” said Satoru Kado, an analyst at Mitsubishi UFJ Research and Consulting.

“It’s pretty clear YCC is becoming unsustainable.”

The BOJ’s decision in December to raise the cap to 0.5% from 0.25% sought, unsuccessfully, to fix market distortions caused by its huge bond buying.

The central bank on Wednesday beefed up a market operation tool to pump liquidity into markets in hope of capping yields, though analysts doubt how effective it will be in taming rises.

“The new operation could compensate the BOJ’s bond buying, but not for too long,” said Tetsuya Inoue, a former BOJ official who is now a senior researcher at Nomura Research Institute.

“At some point in the near future, YCC must go.”