Bank of Japan board member Hajime Takata said on Wednesday the central bank must continue to raise interest rates gradually to avoid upside price risks from materialising.
"Inflation is approaching the BOJ's 2% target with positive corporate behaviour already observed," Takata said in a speech.
"It's important to continue shifting gear gradually on monetary policy, even after January's rate hike, to avoid creating excessively high expectations of continued monetary easing," which could lead to the materialisation of upside price risks and the risk of overheating in financial activity, he said.
The remarks follow recent steady rises in Japanese government bond (JGB) yields, as markets factor in the chance the BOJ could hike interest rates more aggressively than initially thought on prospects of sustained wage gains.
Takata said the BOJ must keep raising interest rates if companies continue to increase prices, wages and investment.
In determining the timing of the next rate hike, the central bank must scrutinise whether increases in prices and wages would spread to smaller firms in regional areas of Japan, he said.
There was a chance inflation may accelerate more than expected due to rising import costs from a weak yen, and heightening wage pressure, Takata said.
"Japan is likely to make progress, especially from fiscal 2025 onward, toward achieving our price target due inflationary pressure stemming from domestic factors such as solid base pay increases and heightening inflation expectations," he said.
