By Leika Kihara and Takahiko Wada
TOKYO/AOMORI, Japan (Reuters) -The Bank of Japan must proceed "slowly but steadily" toward normalising its ultra-loose monetary policy, a hawkish board member Naoki Tamura said, flagging the potential for another interest rate hike if inflationary pressures heighten.
But he also said that the risk of the BOJ being forced to tighten monetary policy aggressively to tame excessive price rises remained small.
"There's no set formula in terms of conditions for raising rates again," Tamura told a news conference on Wednesday.
The bank might be able to consider hiking rates if the likelihood of achieving its 2% inflation target rises further, or if trend inflation or upside price risks heighten, he added.
The yen and Japanese government bond yields fell on Tamura's remarks, which were short of any clear, hawkish hints about the timing of another rate hike.
While warning of some weak signs in consumption and capital expenditure, Tamura said Japan's economy was likely to continue recovering moderately, and sustain a positive cycle in which rising wages push up inflation rates.
"In my view, the central bank's ultimate goal is to bring interest rates back to levels where they can be pushed up or down to adjust demand, and influence price moves," Tamura said in a speech delivered before the news conference.
The BOJ ended eight years of negative interest rates and other remnants of its unorthodox policy last week, making a historic shift away from its focus on reflating growth with decades of massive monetary stimulus.
That said, the side-effects of prolonged easing will remain as short-term interest rates are still stuck around zero and long-term rates are not yet driven fully by market forces, Tamura said.
A former commercial bank executive, Tamura is considered by markets as one of the board's hawkish members. He was one of seven members who voted for last week's decision to end negative rates. The BOJ board consists of nine members including the governor and two deputy governors.
Speaking at parliament in Tokyo, BOJ Governor Kazuo Ueda said on Wednesday it was important to maintain accomodative monetary conditions to support the economy.
"Japan's medium- to long-term inflation expectations, and trend inflation, are still in the process of heading towards 2%," Ueda said.
"We will set short-term rates at an appropriate level at each policy meeting by scrutinising the economic and price outlook, as well as risks," the governor added.
The Japanese yen extended losses after Tamura's remarks to hit a 34-year low against the dollar on Wednesday. Despite last week's interest rate hike, the BOJ's communications have reinforced expectations that another rate hike would be some time off.
The yen was at 151.97 per dollar during Asia trading, down about 0.2% and weaker than the 151.94 level at which Japanese authorities intervened in October 2022 to prop up the currency.
A Reuters poll taken after the March policy shift showed more than half of economists expect the BOJ to hike rates again this year, though most of those do not see rate hikes coming at least until the fourth quarter.