The Bank of Japan may end its negative rate policy next week. Here's what you need to know.

• 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 ultra-accommodative monetary policy stance since 2016.
• Since 2007, Japan has not raised its interest rates, but most analysts predict that this will occur in April, following the "shunto" negotiations between unions and employers, which will provide policymakers with more evidence of a significant wage increase.
• BOJ officials' recent hawkish comments have led Japan to narrowly avoid a technical recession, and there is hope for strong wage growth. As a result, some market repositioning has begun as investors prepare for a possible BOJ move in March.

There are rumors that the Bank of Japan may end its negative rate policy as soon as the next meeting in March.

Most analysts anticipate that Japan's first rate hike since 2007 will occur in April, following the "shunto" annual spring negotiations between unions and employers, which will provide policymakers with more evidence of a significant wage increase.

"Goldman Sachs economists, led by Tomohiro Ota, wrote in a Tuesday note that they continue to expect the BOJ to end its negative interest rate policy (NIRP) in April. However, they noted that a March rate hike cannot be ruled out, but the BOJ's communications at this point are not clear enough to justify assuming a March hike as the base case scenario."

The BOJ can delay the rate hike decision for a month to gather more data, present their reasoning for the major policy change in the quarterly Economic Outlook report, and avoid a rate hike before the fiscal year ends when many financial institutions close their books, according to their statement.

The BOJ Governor and his board members meet eight times a year, but the central bank only updates its economic outlook four times a year: in January, April, July, and October. The next BOJ meeting is scheduled for March 18-19.

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 ultra-accommodative monetary policy stance since 2016.

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 uses bond buying and selling to maintain a specific interest rate through yield curve control.

Japan has been experimenting with unconventional policies, such as asset buying and quantitative easing, for decades in an attempt to revive its economy, which is the fourth largest in the world.

Amir Anvarzadeh, a market strategist at Asymmetric Advisors, stated on CNBC Tuesday that the Bank of Japan has no right to maintain its current monetary policy, which he considers a major policy error, as the economy is not in a position to sustain an ultra-loose monetary policy and quantitative easing.

Japan, the world's fourth-largest economy, barely escaped a technical recession with the release of revised GDP data on Monday, which revealed that private consumption decreased for three consecutive quarters.

Inflation blues

The decline in private consumption in Japan, which was 0.3% quarter on quarter, exceeded the provisional estimates of a 0.2% decline, as reported in the final GDP data released Monday. This underscores the fragility of growth in Japan, which is being hindered by high inflation.

Despite upward revisions being weaker than expected, Japan managed to avoid a technical recession due to its strong capital expenditure.

"Anvarzadeh stated that inflation in Japan is being underestimated because government subsidies, which are set to expire in April, have been keeping inflation "artificially low.""

He added that once they expire, inflation will increase even more.

Ueda has consistently suggested that imported cost pressures resulting from high energy prices in the post-Covid era are likely causing price increases in Japan, and he is searching for evidence of organic cost pressures.

The central bank believes that increasing wages would lead to a more significant spiral, motivating consumers to spend more.

"Regardless of what you might think, cost-push inflation is inflation, and it's everywhere else," said Anvarzadeh. "The big fallacy is that in the last 20 years, it was deflation that hurt consumption."

Due to stagnating wages and falling prices, consumption in Japan was sustained during deflation. However, with wages increasing and inflation still on the rise, consumption has been negatively impacted.

Market repositioning

BOJ officials' recent hawkish comments have led Japan to narrowly avoid a technical recession, and there is hope for strong wage growth. As a result, some market repositioning has begun as investors prepare for a possible BOJ move in March.

On Tuesday, Bank of America's economists updated their forecast for the BOJ negative rate exit, shifting it from April to next week's meeting, indicating a growing divide in market opinions.

The Japanese equity rally has come to a standstill as the yen strengthened against the dollar and 10-year Japanese government bond yields reached their highest in three months on Tuesday.

In comments to Japan's parliament, BOJ governor Ueda appeared to temper expectations by striking a relatively more pessimistic tone on the Japanese economy than two months ago.

According to Reuters, Finance Minister Shunichi Suzuki stated that Japan had not yet reached a point where it could declare deflation as defeated.

'Time is right for wage increase'

The wage negotiations will conclude on Wednesday, and the initial results will be released on Friday. Japan's largest labor union federation, Rengo, announced that workers at major corporations have requested annual salary increases of 5.85%, surpassing the 5% benchmark for the first time in three decades.

If the increase achieved this year is more than 3% and surpasses the biggest increase in the past three decades, it would be a remarkable feat.

According to Shuntaro Takeuchi, a Japan fund manager at Matthews Asia, corporate Japan has been experiencing increased profits and record-high profit margins over the past decade. As a result, the time is right for wage increases due to the shortage of labor.

Corporates are announcing wage hikes higher than 5% this year, with some sectors leading the way. This shows their proactive approach compared to last year, and it's likely that the hikes will fall between 3% and 5%.

What would an exit look like?

Many market participants are looking beyond the timing of BOJ's policy change.

Goldman Sachs economists stated that BOJ Governor Ueda's announcement at the January monetary policy meeting implies that subsequent rate hikes will be very modest, indicating that the monetary policy environment will remain extremely easy for the time being.

The BOJ's policy statement will reveal whether it will mention the future path to limit excessive rate hike expectations and accompanying risk of interest rate rises, or whether it will use ambiguous language to prioritize flexibility in policy to address inflation risks in the future.

The BOJ's decision to exit negative rates may also lead to the abandonment of its yield curve control policy, which aims to keep the 10-year Japanese government bond yield at approximately 0% with a ceiling of 1%.

The Japanese central bank is likely to provide numerical guidance on how many government bonds it will purchase to prevent market disruption, according to Reuters, citing sources.