The Bank of Japan faces the challenge of balancing supporting the yen and sustaining fragile growth, as Japan has entered a technical recession.

• The BOJ Governor is facing pressure to address the Japanese yen's weakness, resulting from the interest rate gap between the U.S. and Japan.
• Despite the BOJ's assessment that high inflation is still unsustainable, it has constrained him and reduced domestic demand, leading to a technical recession.

A former Bank of Japan board member predicts that Japan's central bank will end its negative interest rate policy this spring, but slow growth will hinder its effectiveness in mitigating pressure on the yen's depreciation.

BOJ Governor Kazuo Ueda faces pressure to stop depreciation due to the difference between high US interest rates and Japan's ultra-easy policy. However, he is also constrained by high inflation, which BOJ policymakers still consider unsustainable, despite its impact on domestic demand and the resulting technical recession. This unexpected contraction has caused Japan's economy to rank fourth globally, behind Germany.

Keio University economics professor Sayumi Shirai, who previously served on the BOJ policy board from 2011 to 2016, stated that the current challenge and dilemma is a serious one, according to CNBC's "Squawk Box Asia" on Thursday.

She stated that she believes the BOJ will implement a policy change, such as removing negative interest rates this spring, due to concerns about side effects.

The yen's value decreased to approximately 150 to the dollar this week due to unexpectedly high U.S. inflation data, which dampened hopes of a faster Federal Reserve rate cut. The persistent weakness of the yen has reduced both the purchasing power of Japanese consumers and the value of the country's exports.

Shirai stated that she believes BOJ will make some policy changes this spring, despite their ability to maintain a stable 2% inflation rate. This is due to the anticipation of more market participants that BOJ will normalize its policies this spring.

Between a rock and a hard place

Despite BOJ policymakers' belief that inflation is not yet being driven by domestic demand, the prolonged high inflation rates have negatively impacted domestic consumption, leading to Japan's second consecutive contraction in GDP in the fourth quarter.

For more than a year, the BOJ's 2% target for core core inflation, which excludes food and energy prices, has been exceeded despite inflation gradually slowing.

The BOJ kept short-term interest rates at -0.1% and maintained its yield curve control policy, which sets the upper limit for yield at 1% as a reference, at its January meeting.

BOJ policymakers have been meticulous in their efforts to revive an economy that has been stagnant for decades due to deflationary pressures.

The BOJ is expected to end its negative rates regime at its April policy meeting, following the confirmation of a trend of significant wage increases during the annual spring wage negotiations. The central bank believes that wage increases will lead to a more meaningful spiral, motivating consumers to spend.

Currently, Japanese wages and household consumption are both declining, according to former BOJ policy board member Shirai.

Even though inflation can be above 2% for some time, it is difficult for BOJ to normalize its cycle between price and wages and consumer demand due to the lack of a clear sign.

Shirai stated that although the interest rate differential is creating significant depreciation pressure for the Japanese yen, it is challenging to raise interest rates.

Even if Bank of Japan raises interest rates slightly, it cannot continue to do so because the economy is weak. If they normalize by removing negative interest rates, it will have little impact on the depreciation of the yen.

— CNBC’s Lee Ying Shan contributed to this story.