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© Reuters. FILE PHOTO: A man wearing a protective mask walks past the headquarters of Bank of Japan amid the coronavirus disease (COVID-19) outbreak in Tokyo, Japan, May 22, 2020.REUTERS/Kim Kyung-Hoon By Leika Kihara

TOKYO (Reuters) – The Bank of Japan is set to maintain ultra-low interest rates on Thursday and hold off from major tweaks to its dovish policy guidance, as rising raw material costs force it to focus on underpinning a fragile economic recovery.

The BOJ’s stubborn commitment to its zero-rate programme puts it at odds with major central banks that are shifting toward tighter monetary policy, although inflation in Japan is expected to creep up towards the central bank’s 2% target.

In contrast, surging inflation is prodding the U.S. Federal Reserve and the European Central Bank to remove stimulus deployed during the COVID-19 pandemic.

Prospects of aggressive Fed tightening, which would widen the divergence between U.S. and Japanese interest rates, have pushed the yen to two-decade lows against the dollar.

Speculation has been rife the BOJ could allow long-term rates to rise more or tweak its policy guidance to combat yen declines, as some lawmakers fret further falls in the currency could do more harm than good to the economy by inflating import costs.

But with inflation modest compared with other nations and the economy still below pre-pandemic levels, the BOJ is in no rush to increase borrowing costs or modify a pledge to keep rates at current or lower levels, sources familiar with its thinking have said.

“The output gap in Japan is negative, and there is still a long way to go to achieve the 2% target in a stable manner,” BOJ Governor Haruhiko Kuroda said in a speech on Friday.

“The Bank’s role in the current context is perfectly clear: to persistently continue with the current monetary easing centered on yield curve control.”

At a two-day policy meeting ending on Thursday, the BOJ is widely expected to maintain its short-term rate target at -0.1% and that for the 10-year bond yield around 0%.

In new quarterly forecasts due after Thursday’s meeting, the central bank is expected to raise its inflation forecast for this fiscal year to near 2% reflect rising fuel costs.

But the BOJ will likely cut this year’s growth estimate on soft consumption and project that prices will moderate next year and beyond, as it views current cost-push inflation as transitory.

Markets will focus on Kuroda’s remarks at his post-meeting news conference for clues on whether and how soon the BOJ could modify its dovish policy guidance.

Under the current guidance, the BOJ says it “won’t hesitate to take additional easing steps,” and expects short- and long-term policy rates to “remain at their present or lower levels.”

Some analysts bet the BOJ could tweak the guidance to a more neutral stance as early as its meeting on Thursday.

In Friday’s speech, Kuroda said he saw no need to ramp up stimulus, and that future policy will be data-dependent and “nimble.”

Still, any change in the guidance will be modest and won’t lead to immediate monetary tightening, analysts say.

“We don’t expect the BOJ to adjust yield curve control this time, as it focuses on risks to the economy rather than rising inflation,” said Hiroshi Ugai, chief Japan economist at JPMorgan (NYSE:JPM) Securities, who predicts the central bank could tweak the guidance on Thursday.