The Bank of Japan (BOJ) will pay close attention to land prices and currency movements in addition to the economy and prices when implementing monetary policy, Governor Toshihiko Fukui was quoted as saying.
Fukui also told the Asahi newspaper in an interview published on Saturday that the central bank would raise rates gradually once it confirms stable economic growth and gradual rises in prices, adding the BOJ had no pre-set schedule for future rate hikes.
Financial markets are looking for clues as to when the BOJ may raise the overnight call rate target from a current 0.5 percent. Many investors expect the central bank to wait at least until August.
Fukui said price indicators are the most important thing for the BOJ to watch, but he added: "Our views would become very narrow if we only watch price indicators to make policy judgements."
In the interview, conducted on Friday, Fukui also said that while the BOJ's monetary policy focuses on domestic economic conditions, the central bank also needed to think about its impact on the rest of the world. "We will conduct monetary policy while also watching the impact on international markets via asset prices and currency moves," he added.
Government data showed on Friday that Japanese consumer prices fell 0.1 percent in April from a year earlier, the third straight month of declines. Fukui said earlier this month that the BOJ can raise rates even when core CPI is falling, as long as it has a strong conviction that prices will rise more.
In the interview, Fukui reiterated the BOJ's stance that future rate hikes are needed to ensure a path for stable economic expansion. "It is wrong to think that the BOJ is desperate to raise interest rates. We don't have a scenario of raising interest rates based on a pre-set schedule," he said.
"We still don't have an image (of the next rate hike timing)," he said, adding it would be wrong for markets to expect the BOJ to indicate the timing of future rate hikes.
Despite tepid inflation, the BOJ is wary that keeping interest rates too low for too long could hurt the economy and prompt an excessive build-up in so-called yen carry trade and real estate investments.
Asked whether he saw a risk of Japan's economy going back into an asset bubble seen in the 1980s, Fukui said although the chances were low, if such a problem were to occur, the cost of dealing with it would be high.
"We don't want to go through the bitter experience again," Fukui was quoted as saying, adding the BOJ was "very closely" watching land price movements. But he noted that while the pace of rises in land prices in big cities has been picking up, land prices across the country would unlikely heat up rapidly.
Asked about the yen weakness, Fukui said it was important to make sure that risks of a reversal do not accumulate like "magma". The BOJ raised the key overnight call rate target to 0.25 percent from zero last July and to 0.5 percent in February.
That is still well below 5.25 percent in the United States and 3.75 percent in the euro zone, boosting appetite for yen carry trade, in which investors use low-yielding currency such as the yen as a cheap source of funds to buy higher-yielding assets. Such yen carry trades have helped push down the yen.
The dollar was near 121.75 yen on Friday, nearing Wednesday's three-month high of 121.88. It was the fifth straight week of declines for the yen, the longest since a 6-week losing streak in September-October 2005.