Bank of Japan Governor Kazuo Ueda said on Wednesday it was "still taking time" to sustainably achieve its 2% inflation target, signaling that the central bank will tread carefully in pushing up the country's still near-zero interest rates.
But he also warned of the cost of moving too slowly in raising rates, which could give speculators an excuse to trigger an unwelcome yen slide that pushes up import costs.
"When there's huge uncertainty, you usually want to proceed cautiously and gradually," Ueda said at a panel at the International Monetary Fund on Wednesday.
"But the problem here is if you proceed very, very gradually and create expectations that rates are going to stay at low levels for a very long time, this could lead to a huge build-up of speculative positions which could become problematic," he said. "We need to strike the right balance."
The BOJ ended negative rates in March and raised short-term rates to 0.25% in July on the view Japan was making progress toward sustainably achieving its 2% inflation target.
Ueda has said the bank will keep raising rates if the economy moves in line with its forecast. But he has also stressed the need to scrutinize global uncertainties, such as the U.S. economic outlook, in timing the next rate hike.
Underlying inflation in Japan has been moving around zero before 2022, when it began to rise due to the spillover from global rises in energy and food prices, as well as a boost to wages from a tight labor market, Ueda said in the panel.
"It's still taking time for us to get to 2% in a sustainable manner," Ueda said. "We want to use this opportunity to raise inflation expectations, underlying inflation, and move to a new equilibrium with 2% inflation in a sustainable way," he said.
"That's why we maintain policy easy."
The BOJ is widely expected to keep interest rates steady at next week's policy meeting. A slim majority of economists polled by Reuters saw the BOJ forgoing a hike this year, with most expecting the bank to raise rates again by March.
When asked what keeps him awake at night, Ueda said, "What would be the right size of (policy) normalization going forward, and how best to allocate the total size" through rate hikes across time.
He declined to elaborate, saying it was "very hard" to pin down the appropriate size of future hikes due to the difficulty of estimating Japan's neutral rate of interest.
"I have to say that we can't telegraph all our future movements ex ante," he said, referring to how the BOJ would not commit to a set timetable for raising rates. "What we can do is to explain carefully our basic monetary policy strategy."
