The Bank of Japan will continue to raise interest rates if the economy rebounds from an expected hit from higher U.S. tariffs, the central bank's deputy governor Shinichi Uchida said, while warning of a highly uncertain outlook.
Japan's underlying inflation will stay around the BOJ's 2% target if there is an economic rebound, Uchida told parliament.
He noted that recent gains in domestic prices were largely due to higher import costs and increasing food costs, such as for rice.
"We are mindful that such price rises are having a negative impact on people's livelihood and consumption," he said.
"If our forecast materialises, we will continue to raise our policy rate," Uchida said.
"But there is extremely high uncertainty over the outlook for each country's trade policy and its fallout. As such, we will determine without pre-conception whether the economy and prices move in line with our forecast," he added.
Japan's economy shrank for the first time in a year and at a faster pace than expected, data for the March quarter showed on Friday, underscoring the fragile nature of its recovery now under threat from U.S. President Donald Trump's trade policies.
Having exited a decade-long stimulus policy last year, the BOJ raised interest rates to 0.5% in January and has signaled its readiness to keep hiking borrowing costs if a moderate economic recovery keeps Japan on track to durably hit its 2% inflation target.
But fears of a Trump-induced global slowdown forced the BOJ to sharply cut its growth forecasts at its April 30-May 1 policy meeting, and cast doubt on its view that sustained wage hikes will underpin consumption and the broader economy.
