Bank of Japan Deputy Governor Toshiro Muto, speaking a week after the central bank raised interest rates for the first time in six years, reassured markets on Friday that future rate rises would be gradual.
"Adjustments in interest rate levels will be made in a gradual manner while closely monitoring economic and price conditions," Muto said in a speech in Tokyo.
He said the impact of monetary policy changes takes time to filter through the economy, and for that reason the BoJ needs to conduct monetary policy in a forward-looking manner. But he stressed that forward-looking did not mean the central bank would raise interest rates early. The BoJ ended an era of zero interest rates on July 14, raising its key overnight call rate to 0.25 percent.
At a news conference after the meeting, BoJ Governor Toshihiko Fukui said the central bank had no intention of raising rates at consecutive policy board meetings.
Many market participants expect the BoJ to raise rates once more before the end of 2006. Japanese government bonds and currency markets showed little reaction to Muto's comments. Muto gave few hints about the timing of the BoJ's next move, merely saying the central bank would carefully monitor the economy and prices in its conduct of monetary policy.
"If we can expect the economy and prices to move in line with our outlook report, then we will adjust interest rates gradually in line with changes in economic developments and prices. "In this process, an accommodative monetary environment ensuing from very low interest rates will probably be maintained for some time," Muto said.
In a twice-yearly report on the economy and prices in April, which analysed the outlook for the next two years, the BOJ said Japan's economy would likely achieve sustainable growth under price stability. Muto said the BoJ's assessment in the outlook report had taken into account market expectations for future rate rises.
"People may question and say we would not need to change monetary policy if the economy moves in line with our views (in the outlook report), but the outlook had already factored in market expectations for monetary policy changes," Muto said. "Thus, we would need some degree of adjustments in monetary policy," he added.
On the domestic economy, Muto said capital spending was not overheating at the moment but with the economy and prices recovering steadily, stimulative effects from monetary policy are becoming stronger. He added that consumer prices would remain on a positive trend despite the government's planned revision to calculation methods of the consumer price index (CPI) in August, which is expected to lower the index by around 0.2-0.3 percentage points.