The Bank of Japan will scrap its negative interest rate policy and double the ceiling on its bond yield target in October as support for aggressive stimulus weakens, according to analysts at Bank of America Securities.

"We expect pressure to bring forward normalization to grow over the coming quarters as the rising cost of food and energy potentially triggers backlash from households, resulting in reduced political support for the BOJ and its aggressive easing policies,” Bank of America analysts including Izumi Devalier wrote in a note this week.

The report is likely to fuel continued speculation over possible BOJ policy normalization even though Gov. Haruhiko Kuroda has repeatedly and strongly rejected the idea, given ongoing weakness in Japan’s inflation.

Policy tightening by global central banks including the European Central Bank will also give Japan’s central bank scope to tighten without risking an unwanted appreciation of the yen, the Bank of America analysts wrote, characterizing a one-off interest rate increase as a "dovish hike.”

A clear normalizing step isn’t the base case scenario among BOJ watchers at least for now given the prevalent view that inflation won’t surge to the levels seen in the U.S. and Europe and won’t stay long at the BOJ’s 2% target even if it touches it briefly.

In a show of its continued commitment to its stimulus framework, the BOJ conducted an unlimited bond buying operation last week to keep rates low for the first time since 2018.

The Bank of America analysts expect the BOJ to ditch its negative interest rate of -0.1% and increase the ceiling on its 10-year yield target to 0.5% from the current 0.25% this fall. The analysts previously saw no policy change during Kuroda’s term, which ends in April 2023.

Speculation of potential policy adjustments have grown partly because Japan’s inflation data is expected to surge from April after hovering at just 0.2% in the latest readings. From the April data, slashed telephone charges that have weighed down the overall index by about 1.5 percentage point will fade out and oil prices are expected to exert a further upward effect.

Still, the BOJ doesn’t see the possible rise lasting and that’s a factor that is making some economists stick to their view that the central bank will keep with its current stimulus settings while Kuroda is at the helm.

"We think that the market speculation will strengthen as Japan’s inflation is likely to jump in April,” Masamichi Adachi and Go Kurihara, economists at UBS, wrote in a report.

"We do not think that will be sustainable beyond next year,” the UBS economists wrote. "We thus expect no meaningful policy change at least through our forecast horizon until end of 2023.”