Photo/Illutration The Bank of Japan’s Policy Board members, including Governor Kazuo Ueda, center, attend a monetary policy meeting in Tokyo on April 28, 2023. (Pool)

The Bank of Japan will debate ending its negative interest rate policy next week if Friday's preliminary survey on big firms' wage talks outcome yield strong results, sources said, marking a landmark shift away from its decade-long stimulus program.

While investors are increasingly pricing in the chance of a March policy shift, any such decision could affect global financial markets by altering Japan's status as a lone supplier of massive cheap money, analysts say.

This year's annual wage talks kicked off in full force on Wednesday with Toyota Motor agreeing to give factory workers their biggest pay increase in 25 years, heightening expectations that other companies will follow suit with bumper wage increases.

Such early signs of a strong outcome in this year's annual wage talks have heightened the chances that the BOJ will phase out its massive monetary stimulus, three sources familiar with its thinking said.

The central bank is likely to scrutinize a preliminary survey on the wage talks' outcome, to be released by union umbrella Rengo on Friday, in deciding whether conditions to phase out stimulus have fallen into place, the sources said.

“There seems to be enough factors that justify a March policy shift,” one of the sources said. “In the end, it will be a judgement call by the nine board members,” the source said, speaking on condition of anonymity due to the sensitivity of the matter.

An end to negative interest rate, which has been in place since 2016, would mark a landmark shift away from the BOJ's massive stimulus program and Japan's first interest rate hike since 2007.

A March policy shift, however, is hardly a done deal as some in the nine-member board are worried over recent weak signs in consumption that highlight the fragile nature of Japan's economic recovery, they said.

The BOJ may put off the decision until April if policymakers feel they need to scrutinize more data such as the “tankan” business sentiment survey due on April 1, and the bank's quarterly report on regional Japanese economies, they said.

Many market players expect the BOJ to end negative rates either at its next two-day meeting concluding on Tuesday, or a subsequent meeting on April 25-26.

Upon ending negative rates, the BOJ will also ditch its bond yield control and dismantle a framework created to purchase risky assets such as exchange-traded funds (ETF), they said.

BOJ Governor Kazuo Ueda signaled on Wednesday the bank's readiness to phase out stimulus as soon as next week, pointing to “fairly high pay demands” made by labor unions.

“The outcome of this year's annual wage negotiation is critical” in deciding on the timing of an exit from massive stimulus, Ueda told parliament.

“We're seeing many companies make offers, including today. We hope to reach an appropriate decision looking comprehensively at these results,” as well as other data, he added.

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