Bank of Japan governor Toshihiko Fukui said the central bank still believes prices will show only gradual rises but will watch for a structural change that could make consumer prices respond more in tune to sustained economic growth.
"Unit labor costs will start showing gains and if this and other factors are considered, it will become easier for prices in Japan to rise," Fukui said in a speech. "But prices are not going to spur inflation, they will rise gradually."
Fukui also said that the BoJ will continue lowering the reserve target to a minimum required level in the aftermath of an end to quantitative easing in March, watching short-term rates in the money market.
But he said that ending this process is different from its future decision to change its policy of guiding the overnight rate near zero, which has to be made by looking at the economic climate at the time.
"The end of excess fund draining is not linked to rises in interest rates," he told business leaders at a conference in Tokyo. Fukui added the central bank can keep very low rates even after ending the zero-rate policy. But he didn't elaborate on the issue, saying "the timing of ending the zero-rate policy will be up to the development of the economy and prices."
He also said that the central bank will adjust short-term interest rates in a way that reflects the economy and prices through a period of very low rates, but the tempo of adjusting rates will be gradual.
The BOJ March 9 voted to scrap the five-year-old quantitative easing policy it had kept in place since March 2001, which involved flooding the economy with massive amounts of excess liquidity.
The central bank has shifted the policy target to the traditional unsecured overnight call loan rate and the bank said that it will keep a zero-interest-rate policy for the time being. The market's focus remains squarely on when the BOJ will end the zero-rate policy and raise the key call rate to 0.25%.