After more than four years of ultraloose monetary policy by the Bank of Japan, the economic slump is waning and many BOJ watchers, keying in on recent repeated hints, are predicting the stance may end in the near future.

The central bank adopted the quantitative easing stance in March 2001 to counteract persistent deflation. Under the policy, excess funds are flooded into the money market while interest rates are effectively kept at zero.

BOJ Gov. Toshihiko Fukui, speaking to reporters last week, said the end of quantitative easing could come "before fiscal 2006 starts or a few months after." BOJ Policy Board members also began hinting last month at a swift policy change.

In the wake of these remarks, an increasing number of observers believe the central bank will finally end its unconventional stance in early fiscal 2006. The biggest reason behind the board members' comments appears to be a predicted rise in consumer prices.

"Since all the board members are forecasting a brighter economic outlook and the approaching end of deflation, I expect the BOJ to exit the current policy quite soon," said Susumu Kato, senior economist at Lehman Brothers in Tokyo, predicting the shift may occur sometime between April and June.

During Japan's long slump, the monetary easing stance helped buoy the economy and support the fragile banking sector. But the economy is now recovering steadily and commercial banks are reviving.

Fukui has repeatedly said the central bank will keep the current policy in place until consumer prices rise consistently and there is a consensus among board members that the economy will not slip back into deflation.

The core consumer price index, excluding fresh foods, slipped 0.1 percent year-on-year in August, but many economists expect the index to begin rising by November, as record-high crude oil prices in August push up prices of petroleum products in October. Prices for newly harvested rice are also expected to rise in October and November from a year earlier, boosting the CPI.

The central bank is expected to project a 0.3 percent to 0.5 percent rise in the core CPI in fiscal 2006 against the previous year. This compares with the bank's forecast in May of a 0.3 percent rise.

Lehman Brothers' Kato said the BOJ will probably wait from November to February to confirm whether the CPI uptrend stable.

According to his earliest scenario, the BOJ will end quantitative easing in April after the February figure is released at the end of March.

Experts are watching to see whether the BOJ will shift smoothly to a "normal" policy of guiding interest rates, although they expect the BOJ to keep rates at zero for a while. An abrupt shift could lead to a sudden jump in long-term interest rates, which would affect mortgage interest rates and other loans and eventually hurt the economy.

For the government, surging rates on government bonds mean swelling budget deficits.

Hideo Kumano, who worked at the BOJ for 10 years and is now a senior economist at Dai-ichi Life Research Institute Inc., expects a step by step transition.

He foresees the BOJ first paring the outstanding balance of banks' deposits at the central bank as early as April before moving to guide interest rates higher in June.

Under the ultraloose monetary policy, the BOJ Policy Board currently maintains its target of keeping the outstanding balance within a range of 30 trillion yen to 35 trillion yen, although the central bank also said liquidity can fall short of the target when demand from financial institutions is exceptionally weak.

Before the BOJ introduced the quantitative easing in March 2001, the outstanding balance stood at around 4 trillion yen.

The outstanding balance reflects the amount each commercial bank holds in reserve at the central bank in the event of a crisis.

For the past several months, two of the nine board members called for a reduction in the outstanding balance, but the remaining seven, including Fukui, opposed this move.

Still, Kumano noted there is a possibility the BOJ will wait beyond next August to lift its stance to ensure there is no sign of deflation returning.

This is because the CPI is expected to be revised downward across the board by about 0.3 percentage point in August when items listed on the index are reassessed, he said.

The CPI list is reviewed once every five years to pinpoint the prices of goods.