The governor of the Bank of Japan on Thursday underlined the case for gradually raising interest rates, warning that keeping them too low for too long could prompt an excessive build-up in so-called carry trades.
Toshihiko Fukui reiterated the central bank had no present schedule for raising rates and the timing of any increases would depend on Japan's economic performance. But he suggested current monetary conditions were accommodative.
Japan's interest rates, at 0.5 percent the lowest among Group of Seven nations, are relatively low in comparison with the economy, which has been growing at a little more than 2 percent in recent years, Fukui said.
"We are in the middle of the process where we will cautiously and appropriately adjust interest rates, depending on economic development," Fukui told an upper house financial committee.
However, he said extreme positions in financial and capital markets could build up if people had a fixed idea that interest rates are going to stay low for a long time regardless of economic conditions. "In this regard, I have in mind such things as real estate investments and excessiveness in so-called yen carry trades," he said.
The carry trade, in which investors borrow in a low-yielding currency to purchase high-yielding assets, has been a factor behind the yen's weakness and strength in such currencies as the New Zealand dollar.
Fukui's comments did little to change the perception that the next rate rise is at least a few months off, given limited price pressures. Financial markets did not react. "His comments did not go beyond what the BoJ said in the outlook report," said Tatsuo Ichikawa, chief JGB strategist at ABN Amro.
In a twice-yearly economic outlook in April, the BoJ said the economy would grow 2.1 percent in the fiscal year from April 1 and the following year and that prices would be relatively stable.
BoJ data released earlier in the day showed that Japan's bank lending rose 1.0 percent in April, and the country's most widely watched measure of money supply - M2 plus certificates of deposit (CDs) - rose 1.1 percent, matching market forecast.
Separate government data showed that a survey of Japanese service sector workers, called "economy watchers" for their proximity to consumer and retail trends, produced a diffusion index (DI) of 49.7 in April, down from 50.8 in March.
"In reality, their costs are rising.... So unless (consumer) prices rise moderately eventually, they will have a hard time," Nakamura, who joined the BoJ board in April, said.
Another new board member, Hidetoshi Kamezaki, said the narrowing of Japan's output gap was not boosting prices, to the same extent as in the past, because of globalisation. Prices used to go up when Japan's supply-demand gap in output and labour tightened. Now that is not the case partly because globalisation has forced Japanese firms to compete with rivals from other countries where labour and production costs are cheap.
Growth in Japan's consumer prices in the past year has been less than forecast by the BoJ, forcing the central bank to cut its core consumer price forecast sharply in the April outlook.
The BoJ board members' median forecast for core CPI growth predicted a 0.1 percent rise in April, much lower than a 0.5 percent rise estimated in the previous report in October. Still, Fukui said board members unanimously agree that prices will rise, albeit moderately.