By Leika Kihara
URAWA, Japan, Aug 27 (Reuters) - Bank of Japan Deputy Governor Ryozo Himino on Thursday stressed the need for timely interest rate hikes with a focus on the risk of an inflation overshoot, reinforcing dominant market expectations for a near-term increase in borrowing costs.
But he refrained from giving explicit signals on whether the BOJ would meet market expectations of a September rate hike, as well as on the pace of future increases.
"We must balance the need to gain as much information
as possible, and acting in a timely fashion to avoid being behind the curve on inflation," Himino told a news conference.
"We will debate that balance at each meeting, mindful of the fact underlying inflation is approaching 2%," he said.
Himino said his views on the economic and price outlook have not changed much since the BOJ's previous meeting in July, with weak signs in second-quarter gross domestic product (GDP) data likely due to technical factors.
In a speech delivered before the news briefing, Himino highlighted mounting inflationary pressures caused by rising fuel costs from the Middle East war, robust global AI demand and high import prices from a weak yen.
He also said Japan has now entered a phase where the BOJ must bear in mind the possibility of underlying inflation exceeding its 2% target.
"If underlying inflation deviates above our 2% target, that would have an adverse impact on the economy. We should pay greater attention to upside risks to prices than in the past," Himino said in the speech.
"In-depth deliberations should be held at each monetary policy meeting with these perspectives in mind," he said.
Himino's speech has been closely watched by markets for clues on the pace and timing of future rate hikes, given his past record delivering clear hints on an upcoming policy shift.
"He didn't rule out the chance of a September rate hike and was generally hawkish as expected," said Shotaro Mori, senior economist at SBI Shinsei Bank. "The September meeting is likely to be live."
Sources have told Reuters the BOJ is set to raise the rate as soon as September and is considering hiking more aggressively thereafter than the current pace of roughly two times a year.
A recent spike in wholesale inflation and hawkish BOJ commentary have led markets to nearly fully price in the chance of a September hike.
EASING OFF THE ACCELERATOR
Himino countered the view held by some analysts that hiking rates further could hurt a fragile economy, arguing that adjusting still-loose financial conditions would help distribute assets more efficiently to investment with growth potential.
With underlying inflation approaching 2%, the BOJ must focus on stabilising price growth around that level, he added.
"Raising rates in a timely manner will help avoid a spike in inflation and abrupt rate hikes in the future," and ultimately be in the best interest of smaller firms, Himino said.
After raising its key interest rate to a 31-year high of 1% in June, the BOJ kept monetary policy steady in July but issued its strongest comments to date about mounting inflation risk.
A recent spike in wholesale inflation, which reached 7.2% in July from a year earlier, highlighted mounting price pressure from the Middle East conflict that will likely push up consumer prices with a lag, analysts said.
"As we are still pressing on the accelerator, or keeping financial conditions accommodative, I believe we will need to ease off in a timely manner through rate hikes," Himino said.
"In doing so, we need to check various bits of information" including economic and price developments and financial conditions, he said.
(Reporting by Leika Kihara, additional reporting by Makiko Yamazaki and Takahiko Wada; Editing by Christian Schmollinger and Sam Holmes)
