Bank of Japan Governor Haruhiko Kuroda said the country's financial institutions have sufficient buffers against losses they may incur from rises in bond yields, as long as the market moves are driven by prospects of an economic recovery.
The central bank will also be vigilant to any signs of overheating of asset prices or excessive risk-taking by financial institutions, the BoJ chief said, adding that there were no signs of that now.
The BoJ unleashed the world's most intense burst of stimulus last month, promising to inject $1.4 trillion into the economy in less than two years via massive asset purchases to meet its pledge of achieving 2 percent inflation in roughly two years.
But the central bank's huge bond purchases have jolted bond markets and sent the 10-year yield to its highest in a year last week, casting a cloud over the effectiveness of its easing that attempts to push down borrowing costs.
Declines in bond prices, and a resulting rise in yields, hurts the value of Japanese banks' huge bond holdings and boosts the cost of funding the country's massive public debt.
Kuroda said estimates by the BoJ in April showed a rise in interest rates by around 1-3 percentage points would not cause major concerns over Japan's financial system, as long as the rise is accompanied by improvements in the economy. That is because the economic recovery would lead to increased lending and help improve banks' earnings, he said.