As the risks to the global economy rises, the Bank of Japan is expected to join a chorus of warnings from other policy-makers of the threat to growth from protectionism and signal its resolve to keep the money spigot open.
At this week's policy review, the BOJ is seen maintaining its ultra-easy monetary settings even as years of heavy bond buying dries up market liquidity and hurts bank profits, leaving it well behind its US and European counterparts in dialing back crisis-mode stimulus.
Adding to the plight of narrowing margins for financial institutions, the 10-year yield hit a five-month low of 0.025 percent on Monday as investors flocked to the safety of Japanese government bonds.
Some analysts say 10-year yields may fall below zero, a move that would undermine the BOJ's efforts to steepen the yield curve and give financial institutions some breathing space.
The central bank will tolerate negative long-term rates, as long as the 10-year yield moves within the range of around minus 0.2 to plus 0.2 percent set in July, say sources familiar with the central bank's thinking.
“The BOJ decided to allow yields to move more flexibly, which applies to both rises and falls,” one of the sources said.
At the two-day rate review ending on Thursday, the BOJ is widely expected to keep its short-term rate target at minus 0.1 percent and the 10-year yield target around zero percent.
While the nine-member board is set to maintain its view Japan's economy will continue expanding moderately, it may warn of heightening global risks including from the Sino-US trade war, slowing demand in China and volatile financial markets.
“With interest rates falling across the globe, it would make sense for the BOJ to tolerate declines in long-term rates,” said Mari Iwashita, chief market economist at Daiwa Securities.
“The focus would be on whether the BOJ will acknowledge some weakness in global growth.”
Fears over the potential fallout from the Sino-US trade war prompted the International Monetary Fund to cut its global economic growth forecasts in October. Growing external headwinds also drove markets to scale back expectations of steady US interest rate hikes.
Japan's economy shrank in the third quarter but analysts expect growth to have rebounded by year-end, as solid domestic consumption softens the blow from trade frictions and slowing global demand.
Companies appear unfazed by the trade tensions for now, with the BOJ's quarterly “tankan” survey for December showing big firms are sticking to their upbeat capital expenditure plans.
But some in the central bank worry the trade woes may discourage firms from ramping up spending in the next fiscal year beginning in April 2019, the sources say.