The Japanese yen reached a two-week high against the dollar on Monday, following a report in the Nikkei newspaper that the Bank of Japan (BOJ) would contemplate modifying its yield curve control (YCC) during a two-day meeting concluding on Tuesday.

The Nikkei reported that one of the proposals the BOJ will deliberate upon at its meeting is permitting the yield on 10-year Japanese government bonds (JGBs) to surpass a 1% ceiling through a revision of its guidance regarding unlimited bond buying operations to defend that level.

Analysts assert that while such a move could reduce the BOJ's need to increase bond purchases, it would also solidify market expectations of a near-term end to YCC and negative interest rates.

"The final step in the YCC modification process will be to adjust the bond-buying guidance," said Ataru Okumura, a strategist at SMBC Nikko Securities. "The market's focus will shift to the timing of an exit from minus rates and subsequent rate hikes."

Under YCC, the BOJ establishes a target of approximately 0% for the 10-year yield. In response to criticism that its stringent limit defence was causing unwelcome yen depreciation and market distortions, it increased the de facto yield ceiling from 0.5% in July to 1.0%.

Subsequent to that period, the BOJ has encountered challenges due to persistent inflation and increasing global bond yields, with the 10-year JGB yield on the verge of surpassing the 1% ceiling. Tuesday marked the ten-year bond yield reaching a decade-high 0.955 percent.

Sources told Reuters last week that the BOJ may consider additional adjustments to YCC at its meeting on October 30-31 in an effort to loosen its grasp on the 10-year yield.

It is widely anticipated that the BOJ will maintain its target of 0% for the 10-year yield and -0.1% for short-term rates.

Subsequent to the meeting, the BOJ is expected to release updated quarterly forecasts wherein it anticipates inflation exceeding its objective of 2% for the current year and the following.

However, the bank is anticipated to forecast a deceleration in inflation for 2025, which can be attributed to a decline in growth and the unpredictability surrounding the wage negotiations in Japan next year.

In recent years, the majority of global central banks have aggressively raised interest rates to combat rampant inflation; Japan, on the other hand, has remained a dovish outlier.

Despite BOJ Governor Kazuo Ueda's repeated assurances that ultra-low interest rates will persist, markets are already anticipating a policy transition early the following year.

Reuters surveyed nearly two-thirds of economists who anticipate the BOJ to discontinue negative interest rates next year.

September saw inflation remain above the BOJ's 2% target for the eighteenth consecutive month. According to surveys, as inflation expectations increase, the real cost of borrowing decreases.

The decision is made mere hours after data revealed that Japanese factory output increased by 0.2% in September, which is significantly lower than the 2.5% increase predicted by the market, due to the fact that manufacturers are being squeezed by stagnant Chinese demand.