By Makiko Yamazaki and Yoshifumi Takemoto
TOKYO (Reuters) - Japan is seeing conditions fall in place for the central bank to normalise monetary policy, ruling party heavyweight Katsunobu Kato told Reuters, underscoring growing political support for further interest rate hikes.
But Kato said the Bank of Japan (BOJ) must keep a close eye on economic conditions and coordinate carefully with the government in working out when to raise rates.
"Japan is shifting to an era where prices and wages rise, from one where both barely moved," said Kato, a former chief cabinet secretary and a ruling party veteran seen by some analysts as a candidate to become future prime minister.
"It's therefore natural for monetary policy to revert to the original style in which interest rates move in positive territory reflecting market function," he told Reuters in an interview on Friday.
"Key to the decision on whether to actually raise interest rates is Japan's economy, especially consumption, which isn't necessarily strong."
When asked whether the yen was too weak, Kato said he was more concerned about the impact of the weak yen on inflation than its levels.
"In the past two years, the public has clearly suffered from rising inflation," he added.
The remarks by Kato highlight the ruling party's growing focus on the rising cost of living, driven in part by the weak yen, that may help the BOJ make the case to raise interest rates further.
The BOJ ended eight years of negative interest rates in March on heightening prospects that inflation will durably hit its 2% target, helped by rising wages.
Since then, the central bank has signalled that further rate hikes are likely, cementing market expectations of another increase in borrowing costs by year-end.
Faster-than-expected rate hikes could slow the yen's declines.
The weak yen has inflated raw material import costs, in turn hurting consumption and creating headaches for policymakers looking to shore up a fragile economic recovery.
The yen's recent weakness reflected not just the wide interest rate differential between Japan and other countries, but structural changes in Japan's economy, he said.
With many Japanese companies having shifted production overseas, a weak yen no longer sparks a sharp rise in exports, he said, calling on the need for Japan to revitalise its economy by attracting investment from abroad.