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TOKYO - The Bank of Japan may take monetary policy action if yen falls affect prices significantly, governor Kazuo Ueda said on Wednesday, offering the strongest hint to date the currency's relentless declines could trigger another interest rate hike.
Finance Minister Shunichi Suzuki also voiced "strong concern" on Wednesday over the negative impact of a weak yen, such as boosting import costs, and repeated Tokyo's readiness to intervene in the market to prop up the sagging currency.
The remarks, which followed a meeting between Ueda and Prime Minister Fumio Kishida on Tuesday, underscore the resolve of the government and central bank to cooperate in keeping damaging yen falls in check.
"We need to be mindful of the risk that the impact of currency volatility on inflation is becoming bigger than in the past," as firms are already becoming more keen to raise prices and wages, Ueda told parliament on Wednesday.
"Exchange-rate moves could have a big impact on the economy and prices, so there's a chance we may need to respond with monetary policy," he said.
The remarks compared with those Ueda made after the BOJ's policy meeting on April 26, when he said the yen's recent falls did not have an immediate impact on trend inflation.
Ueda's post-meeting comments have been cited by some traders as having accelerated the yen's declines by heightening market expectations the BOJ will hold off on raising interest rates from current levels around zero for some time.
"The BOJ doesn't want to give the impression it could be forced to hike rates to deal with the weak yen. But it also needs to show it is paying heed to the economic impact of yen falls," said Izuru Kato, chief economist at Totan Research.
"The governor probably tried to strike that balance by changing the tone of his remarks somewhat."
After the yen hit a 34-year low of 160.245 per dollar on April 29, Japanese authorities are suspected to have spent more than 9 trillion yen ($58.4 billion) intervening in the market last week to prop up the currency.
The dollar stood at 155.20 yen on Wednesday, creeping up from a roughly one-month high of 151.86 on May 3.
Ueda repeated that the central bank will "adjust the degree of monetary accommodation" - code for rate hikes, according to BOJ watchers - if trend inflation accelerates toward its 2% target as it projected last month.
He also said BOJ won't necessarily wait for inflation to reach its target one-and-half to two years ahead, in raising rates.
"If trend inflation appears to accelerate as we project, we will adjust the degree of monetary accommodation accordingly," Ueda said, signaling the chance of raising rates near-term and in several stages in coming years.
Many market players expect the BOJ to raise interest rates again sometime this year, having ended negative interest rates and other remnants of its radical stimulus in March.
Speaking in the same parliament committee, finance minister Suzuki said authorities were ready to take "all means available" to deal with excessive yen falls that hurt households and companies by inflating import costs.
Suzuki also said authorities were not looking at specific yen levels in deciding whether to take action. He declined to comment on what he deemed as excessively volatile moves.
(Reporting by Leika Kihara and Satoshi Sugiyama; Additional reporting by Tetsushi Kajimoto and Makiko Yamazaki; Editing by Himani Sarkar and Sam Holmes)