By Leika Kihara and Yoshifumi Takemoto

TOKYO (Reuters) – The Financial institution of Japan (BOJ) is ready to maintain financial coverage regular on Friday and should wrestle to boost rates of interest off their ultra-low ranges this 12 months because of the weak financial system, the nation’s former high foreign money diplomat Hiroshi Watanabe mentioned on Wednesday.

With inflation exceeding the BOJ’s 2% goal, some market gamers wager the central financial institution will part out its controversial bond yield management coverage as early as this week’s assembly.

“The BOJ has no cause to maneuver this week,” with markets jittery of worldwide banking-sector woes and up to date information in Japan displaying souring enterprise sentiment, mentioned Watanabe, who retains shut contacts with incumbent policymakers.

“In reality, the BOJ may discover it onerous to boost charges for the remainder of this 12 months,” as inflation is ready to sluggish under the financial institution’s 2% goal in coming months, he instructed Reuters in an interview.

If the BOJ have been to hike charges subsequent 12 months, it might have to take action when U.S. and European central banks could begin reducing charges to assist their economies hit by aggressive financial tightening now below technique to fight hovering inflation, Watanabe mentioned.

The ensuing interest-rate differential may set off a spike within the yen to round 115 to the greenback from present ranges round 135, he mentioned.

“Will probably be a query of whether or not Japan can tolerate such yen rises, and whether or not the BOJ and the federal government can clarify to the general public the necessity to take such a step,” Watanabe mentioned.

Underneath yield curve management (YCC), the BOJ units a -0.1% goal for short-term rates of interest and caps the 10-year bond yield round zero as a part of efforts to sustainably push up inflation to its 2% goal.

New BOJ Governor Kazuo Ueda has pressured the necessity to hold coverage ultra-loose for now, arguing that the current cost-driven inflation will peter out in coming months.

However he has additionally signaled the possibility of tweaking YCC, which has drawn criticism for inflicting distortions within the form of Japan’s bond yield curve and crushing business banks’ earnings.