TOKYO (Reuters) – The Bank of Japan may raise interest rates if sharp falls in the yen boost inflation or the public's perception of future prices move more than expected, board member Seiji Adachi said on Wednesday.
While short-term currency moves alone would not trigger a policy shift, the central bank could raise Japanese interest rates if excessive yen [devalutation] falls persist and have a big impact on inflation expectations, Adachi said in a speech.
He also said the BOJ must look not just at downside risks to the economy and prices, but upside risks, in guiding policy.
"We must by all means avoid raising interest rates prematurely. But by focusing too much on downside risks, we could see [Japanese] inflation accelerate in a way that forces us to tighten monetary policy sharply later on," Adachi said.
"As long as underlying inflation continues to head toward 2 per cent, it's important to gradually adjust the degree of monetary support reflecting economic, price and financial developments," he said, signalling the chance of a near-term rate hike.
Adachi's remarks highlight the growing significance a weak yen could have on the timing of the next BOJ interest rate hike, which some analysts say may occur as soon as July.
While Japan's economy is not necessarily strong now, consumption, exports and capital expenditure are likely to recover as households begin to benefit from rising wages and overseas economies show signs of recovery, Adachi said.
He also said consumer inflation will reaccelerate from summer through around autumn this year due to rising import costs and prospects of sustained wage gains.
"If yen falls accelerate or persist, consumer inflation may rebound sooner than expected. If this happens at a time when there is a higher chance of inflation durably and stably exceeding 2pc, we may need to push forward the timing of an interest rate hike," Adachi said.
The BOJ will also reduce its bond buying sometime in the future in accordance with its decision in March to end a policy that capped bond yields around zero, Adachi said.
Any reduction in bond purchases will be done in several stages to avoid destabilising markets, he added.
The yen has depreciated by roughly 10pc against the dollar so far this year despite the BOJ's decision in March to end eight years of negative rates, as markets focused on the still-huge divergence between Japanese and US interest rates.
The weak yen has become a headache for policymakers worried about the hit to consumption from rising import costs, and led some market players to bet on the chance of a near-term interest rate hike to slow the currency depreciation.
While the BOJ has ruled out using monetary policy to affect currency moves, rising concerns over the yen have pushed some government and business executives to call on the central bank to raise rates from near-zero levels.
BOJ Governor Kazuo Ueda has said the central bank intends to hike rates to levels considered neutral to the economy, as long as growth and inflation move in line with its projections.