By Leika Kihara

TOKYO (Reuters) -Early signs of a strong outcome in this year’s annual wage talks have heightened the chances that the Bank of Japan will end its negative interest rate policy next week, three sources familiar with its thinking said.

The central bank is likely to scrutinise a preliminary survey on the wage talks’ outcome, to be released by union umbrella Rengo on Friday, in deciding whether conditions to phase out stimulus have fallen into place, the sources said.

This year’s annual wage talks kicked off in full force on Wednesday with Toyota Motor agreeing to give factory workers their biggest pay increase in 25 years, heightening expectations that other companies will follow suit with bumper wage increases.

“There seems to be enough factors that justify a March policy shift,” one of the sources said. “In the end, it will be a judgement call by the nine board members,” the source said, speaking on condition of anonymity due to the sensitivity of the matter.

BOJ Governor Kazuo Ueda signalled the bank’s readiness to phase out its massive stimulus as soon as next week, pointing to “fairly high pay demands” made by labour unions.

“The outcome of this year’s annual wage negotiation is critical” in deciding on the timing of an exit from massive stimulus, Ueda told parliament on Wednesday.

“We’re seeing many companies make offers, including today. We hope to reach an appropriate decision looking comprehensively at these results,” as well as other data, he added.

Many market players expect the BOJ to end negative rates either at its next two-day meeting concluding on Tuesday, or a subsequent meeting in April.

An end to negative interest rate, which has been in place since 2016, would mark a landmark shift away from the BOJ’s massive stimulus programme and Japan’s first interest rate hike since 2007.

(Reporting by Leika Kihara; Additional reporting by Takahiko Wada, Tetsushi Kajimoto, Takaya Yamaguchi and Yoshifumi Takemoto; Editing by Jacqueline Wong, Shri Navaratnam and Angus MacSwan)

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