By Leika Kihara
OSAKA (Reuters) -Bank of Japan Governor Kazuo Ueda said inflation was on track to durably hit the bank's target but warned of global uncertainties that could discourage firms from raising wages, leaving himself a free hand on whether to raise interest rates in October.
Ueda reiterated the central bank's resolve to continue raising still-low interest rates if the economy and prices move in line with its forecasts.
But he said there were various uncertainties surrounding Japan's economic
outlook, such as growing signs of labour market weakness in the United States and the expected impact of higher U.S. tariffs on Japanese corporate profits.
"If uncertainty regarding overseas economies and trade policies remains high, firms may place stronger emphasis on cost-cutting and may weaken their efforts to reflect price increases in wages," Ueda said in a speech to business leaders in the western Japan city of Osaka on Friday.
"The future course of the U.S. economy and the conduct of monetary policy could significantly affect Japan's economy and prices," Ueda said. "We will therefore continue to closely monitor the situation," he added.
The Japanese yen weakened 0.2% to 147.60 per U.S. dollar after Ueda's comments, as some market players interpreted them as reducing the likelihood of a near-term rate hike.
Market players have been closely watching his comments for any clues on how soon the BOJ will resume a rate-hike cycle that has been paused due to uncertainty over the economic fallout from U.S. tariffs.
A hawkish board split at the BOJ's September meeting and calls for a near-term rate hike by a dovish policymaker have led markets to price in over a 60% chance the bank will hike rates to 0.75% from 0.5% at its next policy meeting on October 29-30.
Ueda said Japan's economy was weathering the hit from U.S. tariffs so far, with many companies armed with buffers from high profits accumulated in the past.
He also said underlying inflation, or the broad price trend excluding one-off factors, will accelerate toward the BOJ's target - removing earlier reference it will briefly stall in a nod to recent mounting pressure from rising food costs.
"Depending on firms' wage- and price-setting behaviour, it's possible that price rises will persist longer than expected," Ueda said. But he added that prolonged food price rises could also hurt consumption and push down inflation.
"We will carefully examine the likelihood of our baseline scenario materialising, as well as both upside and downside risks" in deciding on monetary policy, Ueda said.
The remarks came in the wake of Wednesday's tankan quarterly survey that showed confidence among big Japanese manufacturers improved for the second straight quarter.
The BOJ ended a massive, decade-long stimulus programme last year and raised rates to 0.5% in January, on the view that Japan was on the cusp of durably hitting its inflation target of 2%.
While inflation has exceeded 2% for more than three years, Ueda has stressed the need to tread cautiously in raising borrowing costs to ensure price rises are driven by wage gains and robust domestic demand.
(Reporting by Leika Kihara; Additional reporting by Ankur Banerjee in Singapore; Editing by Muralikumar Anantharaman and Sam Holmes)
