On Thursday, Bank of Japan policy board member Asahi Noguchi reiterated the central bank's consensus that "patience will be needed to maintain accommodative monetary policy" until wage growth gains momentum and inflation eases in the coming months.
Under its Yield Curve Control (YCC) policy, the BOJ currently sets a short-term interest rate target of -0.1% and caps 10-year bond yields at around 0% to stimulate the economy.
In July, the BOJ changed its YCC policy, raising the effective ceiling on 10-year government bond yields from 0.5 per cent to 1 per cent. In September, the BOJ kept its YCC policy unchanged.
However, Japan's inflation rate has been above the target of 2% for more than a year, and there is widespread speculation that the BOJ may adjust the YCC.
The BOJ's next meeting is on Oct. 30-31, when it will also release new forecasts for future economic growth and inflation.
Focus on wage growth
For now, the market is focused on wage growth, which is a key factor in the BOJ's goal of achieving sustainable inflation.
Since the bursting of the asset bubble, wage trends in Japan have been largely flat over the past three decades. The BOJ has previously stressed that sustainable wage growth is a prerequisite for exiting its loose monetary policy.
Noguchi called the increase of more than 3 percent agreed earlier this year, the highest in 30 years, "significant."
"The big focus now is whether this momentum (of wage growth) will also be maintained from now on," Noguchi said. The boj's task now is to achieve this through monetary easing."
Inflation has moderated
In addition, Noguchi's analysis believes that household inflation expectations are steadily rising, but if wage growth lags behind price increases, consumers will have no choice but to reduce spending.
He expects inflation to slow in the second half of the year as the impact of higher-priced imports fades.
The latest data also seem to confirm a slowdown in inflation. Japan's core CPI rose 3.1 percent in August from a year earlier, and the September CPI will be released on October 20.
Producer prices rose 2 per cent year-on-year in September, the lowest level since March 2021 and below market expectations of 2.4 per cent. On a month-on-month basis, it fell 0.3 per cent compared with market expectations for a 0.1 per cent gain.
The data showed that prices of imported goods continued to fall, especially for wood and energy. This is in line with the view of the Bank of Japan.
The yen is expected to continue to fall
However, the yen's recent fall could raise the cost of imports and reignite inflationary pressures.
Usdjpy, which breached the key 150 level on Oct. 3, is now trading below 150, last trading at 148.975.
However, Wall Street widely expects the yen to fall further.
Garth Appelt, head of FX for the Americas at Mizuho, believes the dollar-yen exchange rate will fall to 155 in the first quarter of next year as the Bank of Japan sticks to easing policy, and it may take a Fed turn and a weaker dollar to finally stop the yen's decline.
Appelt forecasts that the yen is likely to maintain its downward trend, trading between 148 and 152 for the rest of the year; By the end of March 2024, the yen will slide to between 150 and 155 per dollar.
Strategists at Goldman Sachs also said in August that the yen would fall to 155 by early next year as the Bank of Japan remained dovish. Bank of America expects the yen to fall to 155 in the first half of next year.
The last time the yen traded at 155 to the dollar was in the mid-1990s, before Japan fell into a financial crisis that became known as Japan's lost three decades.