Bank of Japan Governor Kazuo Ueda said the central bank may raise interest rates next month depending on economic data available at the time, emphasizing its determination to slowly raise borrowing costs from current levels of near zero.
While rising import costs due to a weak yen will likely depress household spending, rising wages will support consumption and keep the economy on track for a moderate recovery, Ueda told parliament on Tuesday.
"Our decision on reducing bond purchases and raising interest rates are two different things," Ueda said. "It is possible that we could raise interest rates at our next policy meeting, depending on economic, price, and financial data and information available at that time."
At a policy meeting on Friday, the BOJ decided to begin tapering its massive bond purchases and announced detailed plans in July to reduce its balance sheet by nearly $5 trillion, taking another step toward reducing massive monetary stimulus.
The decision has raised uncertainty over whether the BOJ may also raise short-term rates at its July 30-31 meeting or wait until the end of the year to avoid market volatility.
Ueda said the BOJ was not yet fully convinced that inflation would sustainably reach the 2% target, stressing the need to take "a little more time" to examine the data before raising rates again.
But he said corporate pricing and wage-setting behavior had clearly changed amid record profits and a tight job market.
"The economy will probably see clearer signs of a positive wage-inflation cycle" as nominal wages rise, he said.
Ueda gave no indication of the rate and size of the BOJ's bond reduction plan to be announced next month. He said the central bank would avoid using bond-buying operations as a monetary policy tool, or as a way to communicate its policy intentions.
The BOJ exited negative rates and bond yield controls in March in a significant shift away from a decade-long radical stimulus program.
With inflation above the 2% target for two years, it also hints that it will raise short-term rates to levels that neither cool nor heat the economy, seen by analysts as around 1-2%.
In a sign of widespread inflationary pressures, the prices Japanese firms charge each other for services with high labor costs rose 2.8% in April from a year ago, marking the fastest increase in nearly four years, BOJ data showed on Tuesday.
A weak yen complicates the BOJ's policy path. Although it accelerated inflation by raising the prices of imported goods, the subsequent rise in the cost of living has depressed consumption and cast doubt on the strength of Japan's economy.
Many economists expect the BOJ to raise interest rates to 0.25% this year, although they are divided on whether that will happen in July or at the end of the year.
