Matsue, Shimane Pref. –

Bank of Japan (BOJ) board member Junko Nakagawa has said the economy is making steady progress towards achieving its 2% inflation target and signaled conviction that conditions for phasing out its massive stimulus are falling into place.

The remarks came as Japan's largest industrial labor group said some member unions had seen their wage demands met in full by management, heightening prospects of a broad-based pay rise the BOJ has set as a prerequisite for exiting its stimulus program.

All eyes are on BOJ Gov. Kazuo Ueda's scheduled appearance in parliament later on Thursday, where he will likely be grilled for clues on how soon the central bank will end its negative interest rate policy and other stimulus tools.

With inflation exceeding the BOJ's target for well over a year now and prospects for sustained wage gains heightening, many market players expect the central bank to end its negative interest rate policy this month or next.

In a speech to business leaders in the southwest Japan city of Matsue, in Shimane Prefecture, Nakagawa said the country's intensifying labor shortages were prodding more companies to resume their practice of increasing pay annually.

"We can say that prospects for the economy to achieve a positive cycle of (rising) inflation and wages are in sight," Nakagawa said in the speech. "There are clear signs of change in how companies set wages. Japan is moving steadily towards sustainably and stably achieving our 2% inflation target," she said.

The remarks follow those of fellow BOJ board member Hajime Takata, who said last week Japan was finally seeing prospects it could durably achieve the bank's 2% inflation target.

Despite recent signs of weakness in the economy, BOJ policymakers have signaled their intention to move ahead with their plan to dial back stimulus — including Ueda, who offered an upbeat take on Japan's economic outlook last week.

Japan's real wages shrank in January for the 22nd straight month but at the slowest pace in over a year, data showed Thursday, as price pressures from rising food and raw material costs dissipated.

The growing momentum for a March exit, and a media report that at least one of the BOJ's nine board members is likely to call for removing negative rates this month, pushed up the yen to a one-month high past ¥149 to the dollar.

"The potential for (a) March pivot is growing," said Hirofumi Suzuki, chief FX strategist at SMBC.

"Nakagawa's comments do not negate this view. As a result, the yen is appreciating, continuing the trend from yesterday. The yen looks strong in the near term."

In an effort to reflate growth and keep inflation sustainably around 2%, the BOJ guides short-term interest rates at minus 0.1% and sets a 0% target for the 10-year bond yield, under a policy dubbed yield curve control (YCC).

It also buys huge amounts of government bonds and keeps in place a framework to buy risky assets such as trust funds investing in stocks and property.

BOJ officials, including Deputy Gov. Shinichi Uchida, have signaled that the central bank will overhaul all of the tools when debating an exit from negative rates.

Ueda has said the outcome of this year's annual spring wage negotiations will be key to determining how soon the BOJ can phase out the monetary easing measures.

Big firms will settle their wage negotiations with unions on March 13, days before the BOJ's policy meeting on March 18 to 19.

The pay hike agreed so far was the biggest since the UA Zensen, an umbrella group that represents 2,237 unions, was established in 2012, likely adding to the momentum of the ongoing wage negotiations.

While pointing to some positive signs on the wage outlook, Nakagawa said there was a risk that wages fail to rise enough and hurt household sentiment, thereby cooling consumption.

"If we judge that achievement of our price target is in sight ... we will debate and decide whether or not to modify our policy means, including yield curve control and risky asset buying," Nakagawa said.