It is difficult for the Bank of Japan to raise interest rates above zero, and the rebound of the dollar/yen may continue

The Bank of Japan maintained its ultra-loose monetary policy on Tuesday, in line with market expectations and highlighting policymakers' tendency to wait for more clues as to whether wage increases will be enough to keep inflation near its 2 per cent target for long.

The Bank of Japan also did not change its dovish policy guidance, dashing the hopes of some traders who had expected the central bank to adjust its language to signal that negative rates would end in the short term.

Kazuo Ueda, governor of the Bank of Japan, said prices and wages appeared to be moving in the right direction, with unions and big companies signalling that wage growth was likely to continue next year. But he warned that the situation remained unclear.

"The likelihood of trend inflation accelerating towards our price target is gradually increasing," Mr. Ueda said at a news conference after the meeting. "But we still need to carefully examine whether a positive wage-inflation cycle is in place."

At its two-day meeting, which ended on Tuesday, the BoJ kept its targets for short-term interest rates at minus 0.1 per cent and 10-year government bond yields at around 0 per cent, and reiterated its pledge to increase stimulus "without hesitation" if necessary.

After the Bank of Japan decided to suspend the gradual withdrawal of stimulus policies, the yen fell and Japanese stocks rose.

Inflation in Japan has remained above 2 percent for more than a year, and some companies have signaled they are prepared to continue raising wages, raising the possibility that the Bank of Japan will finally abandon its dovish stance.

More than 80 per cent of analysts expect the BoJ to end its negative interest rate policy next year, with half expecting April as the most likely date, according to agency surveys. Some believe a policy shift could come in January.

Mr. Ueda did not give a clear signal on when the BoJ would exit its negative interest rate policy, but said "there won't be much data" between now and the next policy meeting on January 22-23.

He also said that the Bank of Japan would not rush to raise interest rates just because the Federal Reserve could start cutting rates soon.

"Obviously, I've been thinking about various scenarios, how we can change policy when certain conditions are met," Mr. Ueda said.

"But the outlook is highly uncertain and we cannot yet see inflation consistently and steadily achieving our objective. So it is difficult to determine how we will exit now."

Since taking office in April, Mr. Ueda has loosened the central bank's grip on long-term interest rates in July and October, and the market believes that the next step will be to raise the target for short-term rates to about zero from the current minus 0.1 per cent.

Some analysts have warned that already-weak consumption could worsen next year if wage growth is not enough to cushion the blow from rising inflation.

But the Bank of Japan insisted that consumption would continue to grow modestly, underscoring its confidence in the economic recovery.

The Bank of Japan may find it easier to take action in months like January and April

While inflation-adjusted real wages continued to fall, Mr. Ueda said that if the BoJ could foresee real wage growth turning positive, that alone would not prevent the normalisation of ultra-loose policy.

"The prospects for achieving our price targets sustainably are increasing," he said. "But we prefer to look at more data in terms of whether the threshold is met."

According to analysts,The Bank of Japan may find it easier to take action in months like January and AprilAt that time, the Bank of Japan will release its quarterly outlook report, providing new forecasts for economic growth and prices.

Even if the Bank of Japan exits negative interest rates, it will be difficult to raise interest rates above zero

However, with central banks in the United States and Europe signalling that they are done raising interest rates, a sharp change in the global monetary policy environment could complicate the BoJ's decision.

Raising rates at a time when other central banks are cutting rates could trigger a stronger yen, hurting the profits of big manufacturers and making them reluctant to raise wages, analysts say.

"Ueda may want autonomy in the timing of the exit while mentioning how Japan is getting closer to achieving its price target," said Yasuya Ueno, chief economist at Mizuho Securities.

Moody's, senior economist Stefan Angrick, expects the Bank of Japan to abandon its negative interest rate policy in April, around the time the spring wage negotiations have preliminary results. Nonetheless,It is hard to see the Bank of Japan raising interest rates further above 0 per cent, with a weak economy, a rising yen, slowing inflation and the readiness of central banks around the world to cut rates all suggesting further increases are out of the question.

The rebound in the dollar/yen driven by the Bank of Japan's decision may continue

After the Bank of Japan made its latest policy decision, the relationship between the closing price of the dollar and the yen relative to key technical levels will be the key to its continued recovery.

After a two-day policy meeting, the Bank of Japan kept its ultra-loose monetary policy unchanged and did not adjust its forward guidance, and the yen fell across the board on Tuesday.

Ahead of Tuesday's announcement, the dollar had rallied against the yen before accelerating its rally, climbing above the Ichimu EQ line at the midpoint of the past nine sessions, which is currently at 144.12. If the daily closing price is higher than this technical level widely used in Japan, a bigger rally is possible.

Last week, the Federal Reserve turned its focus to the timing of interest rate cuts. While this led to an initial decline in USD/JPY, it eventually gained significant technical support at the key 140.71 Fibonacci retracement, which was a 78.6% retracement from 137.25 in July to 151.92 in November.