The Bank of Japan is predicted by Goldman Sachs to increase interest rates on Tuesday.

• According to Goldman's Japan economist Tomohiro Ota, the stronger-than-expected salary gains during the annual "shunto" wages negotiations and subsequent Japanese news reports of an exit from negative rates at the BOJ's March meeting, which ends Tuesday, have contributed to a positive outlook for the Japanese economy.
• In recent weeks, an increasing number of economists have shifted their rate hike forecasts from April to March, indicating that salary negotiations this year are likely to be more robust than anticipated.

The Bank of Japan is predicted by Goldman Sachs to increase interest rates for the first time in 17 years during its March meeting this week, instead of the previously forecasted April decision.

According to Tomohiro Ota, the bank's senior Japan economist, stronger-than-expected salary gains during the annual "shunto" wages negotiations and subsequent Japanese news reports of an exit from negative rates at the BOJ's March meeting, which ends Tuesday, have contributed to the positive outlook for the Japanese economy.

"Ota wrote in a Monday note that the BOJ has not sent any signal denying the news, implying that the BOJ probably no longer needs more data for the policy change and can proceed with it without waiting for the quarterly Economic Outlook report in April."

In recent weeks, an increasing number of economists have shifted their rate hike forecasts from April to March, indicating that salary negotiations this year are likely to be more robust than anticipated.

Over the past 16 months, the central bank has relaxed its yield curve control policy for longer term interest rates, but has kept interest rates at -0.1% and set an upper limit of 1% for the 10-year Japanese government bond yield as a reference.

The BOJ Governor Kazuo Ueda and his eight board members meet eight times a year, but the central bank updates its economic outlook only four times a year, which are in January, April, July, and October.

Virtuous spiral

Ueda has stated that the success of this year's wage negotiations will be crucial in maintaining sustainable price increases. The Bank of Japan predicts that an increase in wages will result in a virtuous cycle that will ultimately lead to inflation driven by domestic demand.

Small firms' workers can anticipate receiving an average pay increase of 4.42%, with Rengo's members experiencing a 3.7% increase in base pay. This surpasses last year's growth and represents the most significant rise in pay in three decades.

Although "core core inflation," which excludes food and energy prices, has surpassed its 2% target for over a year, the BOJ has remained largely unchanged in its current ultra-loose monetary policy, which has been in effect since 2016.

If the Bank of Japan ends its negative rates regime, it will signal the end of its experimentation with monetary policy aimed at reviving the world's fourth-largest economy from deflation.