Interest rate hikes are back on the radar at the Bank of Japan, for the first time in a decade, as the U.S. Federal Reserve's tightening cycle pushes global bond yields higher, heralding a new era for central banks retreating from post-crisis stimulus.
With inflation stubbornly adrift of its 2 % target, and having just revamped its policy framework, the BOJ is in no rush to raise its 10-year bond yield target, and sees any talk of such a move as hypothetical and more a long-term option.
But the central bank is more open to discussing the idea and may contemplate raising the target as early as next year - if long-term rates keep rising, reflecting clear improvements in the economy, say people familiar with the bank's thinking.
"The BOJ's focus next year may not be about whether to ease more but to possibly raise its yield target," said one of those people, adding that a small hike next year cannot be ruled out.
"There's a possibility the BOJ could lift the target before inflation hits 2 %," another person said, adding, though, that the threshold for doing so would be "quite high".
While any BOJ rate hike would be some way off, it would underscore a shift in global central banking as the Fed and the European Central Bank gradually wind down their extraordinary stimulus plans deployed after the 2008 global financial crisis.
It would also be a landmark shift in the BOJ's prolonged battle with deflation. The last time it tightened policy was in 2007, when it raised its short-term rate target to 0.5 % after ending a previous spell of quantitative easing.
Under a new policy framework adopted in September, the BOJ pledged to guide short-term rates to minus 0.1 % and the 10-year Japanese government bond yield around zero percent.
The BOJ sees no need to raise the targets for now and has stressed that its priority is to cap 10-year yields around the target via huge bond purchases.
But as expectations of Fed rate hikes and inflation-stoking policies by U.S. President-elect Donald Trump push up global yields, there is a growing awareness inside the BOJ that it may not be able to keep 10-year yields around zero for long without expanding an already huge balance sheet.
As global trade picks up, central bank policymakers are increasingly confident of Japan's recovery and thus more comfortable brainstorming the idea of taking steps that could be perceived as monetary tightening, the sources say.
Analysts are split on how quickly the BOJ could act.
Those who see a fairly strong chance of a rate hike next year point to an expected rebound in consumer inflation, driven by rising oil prices and a weak yen that pushes up import costs.
"The BOJ may consider raising the yield target if the yen falls too much and begins to hurt consumption by raising the cost of living," said Masaaki Kanno, chief Japan economist at JPMorgan Securities.
BOJ officials say talk of a rate hike is very premature, and stress that such a move becomes a real possibility only when there are clear signs that inflation expectations are heightening on the back of a strong economic recovery.
There is also no consensus within the nine-member BOJ board on what would justify raising rates, with some more cautious of pulling the trigger than others.
Communicating the BOJ's policy intention to markets would also be challenging, particularly if inflation remains short of the target.
Some BOJ officials are already thinking how best to justify raising the yield target without giving the impression it's eyeing full-blown tightening - no easy task for a central bank known to wrong-foot markets.
"By raising the yield target, the BOJ risks opening a Pandora's box because once you do so, bond yields might spike on expectations of more rate hikes ahead," said Izuru Kato, chief economist at Totan Research.
"However the BOJ explains the move, markets will see it as monetary tightening. It would be hard to explain why you're doing this before inflation hits 2 %."