By Leika Kihara
NIIGATA, Japan (Reuters) -The Bank of Japan must continue to normalise monetary policy by raising real interest rates to "a state of equilibrium" to avoid creating unintended distortions in the future, its board member Junko Koeda said on Thursday.
The output gap has been around 0%, while labour market conditions have been tight due to labour shortages, she said.
"In this situation, the BOJ must continue to raise the policy interest rate and adjust the degree of monetary accommodation
in accordance with improvement in economic activity and prices," she said in a speech.
BOJ Governor Kazuo Ueda has said the central bank will continue to raise interest rates, now at 0.5%, if it becomes convinced that underlying inflation will stabilise around its 2% target.
Markets are closely watching BOJ policy signals as Prime Minister Sanae Takaichi has voiced displeasure over the idea of another rate hike in the near term and urged the central bank to cooperate with government efforts to reflate the economy.
"I believe that underlying inflation is about 2 percent," Koeda said. "But in order to achieve our price target, it is important to examine the extent to which underlying inflation has remained stable or been anchored," she said.
It is therefore important to scrutinise whether inflation expectations would be stable, and look comprehensively at factors that affect prices such as the strength of the economy, Koeda said.
(Reporting by Leika Kihara; Editing by Muralikumar Anantharaman & Shri Navaratnam)
