The Bank of Japan (BoJ) is expected to stand pat this Thursday, keeping the short-term and long-term rate targets unchanged at -0.1 and zero percent respectively. This is against the backdrop that the United States Federal Reserve will likely raise rates at the Federal Open Market Committee (FOMC) meeting this week.

The BoJ is expected to stay relatively dovish compared to the European Central Bank (ECB). Economic data in Japan are weaker than in Eurozone. While GDP growth has reverted to 1 percent, owing to the recovery in exports, inflation and inflation expectations have remained sluggish, DBS Research reported in its latest publication.

Further, headline CPI was slightly positive at 0.5 percent in January, and core CPI less food and energy was about zero. By contrast, headline and core CPI in Europe have hit 2 and 0.9 percent respectively. Like the ECB, the BoJ also targets 2 percent inflation.

However, unlike Europe, Japan never achieved 2 percent inflation during the past two decades (except during the 2014 sales tax hike). Overcoming deflation is a tougher task for Japan, which requires the central bank to keep stimulus in place for longer.

Meanwhile, Abe’s government has been pursuing a weak currency policy over the past four years, taking the view that the yen’s depreciation will boost exports and investment as well as create inflation expectations.

"Given the remaining weakness in inflation or inflation expectations at present and the renewed decline in oil prices, a higher USD/JPY should be tolerated by the BoJ for the time being," the report said.