By Leika Kihara
TOKYO, Jan 18 (Reuters) - The Bank of Japan is likely to maintain its ultra-loose monetary settings next week, putting the focus on any hints Governor Kazuo Ueda drops about when the central bank will boost short-term interest rates out of negative territory.
As many policymakers want to spend a few more months determining whether wage increases will broaden enough to keep inflation sustainably at the BOJ's 2% target, markets now expect a rate hike in March or April at the earliest.
While the BOJ likely has its eyes set on ending negative rates, four people familiar with the central bank's thinking said there were plenty of benefits to holding fire at least until its April 25-26 meeting.
Surveys and comments from business lobbies have shown an increasing chance Japan's spring wage hikes will be above last year's 30-year high 3.58% for major firms - a key prerequisite Ueda has set for exiting ultra-loose monetary policy, which is an outlier among major central banks.
Many BOJ policymakers want to check whether the increases will become more widespread and prod companies to pass on higher labour costs via price hikes, particularly for services, the sources told Reuters.
That is in line with a Reuters poll of analysts, who unanimously forecast the BOJ would keep its short-term interest rate target at minus 0.1% and that for the 10-year government bond yield around 0% at the two-day meeting ending on Tuesday. Ueda will hold a press conference after the decision. Those usually start around 0630 GMT.
With easing cost-push pressure slowing inflation back towards its 2% target, the BOJ can afford to await more data, such as the outcome of the annual wage talks between big firms and unions in mid-March, said the sources, asking not to be identified because of the sensitivity of the matter.
NO 'RUSH TOWARDS THE EXIT'
"The possibility of the BOJ being behind the curve in addressing inflationary risks is small, one source said, echoing the view of two others. "There's no pressure to rush towards the exit," another source said.
In quarterly projections due after the meeting, the BOJ board is expected to cut its core inflation estimate for the fiscal year starting in April but roughly maintain its forecast for trend inflation to stay near 2% in coming years, sources have told Reuters.
With inflation running above the BOJ's 2% target for more than a year, many market players expect the bank to start phasing out its massive stimulus this year.
But investors trimmed bets of a January tightening after a New Year Day's earthquake devastated parts of central Japan and Ueda said in a recent interview that he was in no rush to unwind ultra-loose policy.
Among the reasons the BOJ could wait at least until April is that the board will publish its initial forecasts for fiscal 2026 after that meeting, which could help justify a policy shift by predicting long-run inflation of around 2%.
In addition to the wage talks, the bank would also be able to take into account the economic and market fallout from a possible interest rate cut by the U.S. Federal Reserve.
Former BOJ executive Eiji Maeda expects the BOJ to end negative rates in April if it foresees inflation staying around its 2% target through fiscal 2026.
"We're clearly seeing changes in Japan's price moves", with Japan shaking off a 25-year-old deflationary mindset, Maeda said. "A sustainable, domestically driven rise in inflation is already kicking off."
(Reporting by Leika Kihara; Additional reporting by Takahiko Wada, Tetsushi Kajimoto, Takaya Yamaguchi and Kentaro Sugiyama; Editing by William Mallard)