By Leika Kihara and Satoshi Sugiyama
(Reuters) -Prime Minister Shigeru Ishiba said Japan is not in an environment for an additional rate increase, in an apparent effort to shake off his reputation as a monetary hawk, after a meeting with Bank of Japan Governor Kazuo Ueda on Wednesday.
"I do not believe that we are in an environment that would require us to raise interest rates further," Ishiba told reporters on Wednesday night in the most explicit remark to date from a prime minister pushing back against further rate hikes.
The yen weakened after Ishiba's remarks as markets interpreted them as reducing the chance of a near-term interest rate hike. The dollar was last up 0.77% against the yen at 144.71 yen per dollar.
A majority of economists polled by Reuters on Sept. 4-12 had expected the BOJ to raise rates again by year-end.
Ishiba, who was officially appointed as prime minister on Tuesday, had been seen by markets as endorsing the BOJ's policy normalisation, in part because of his comments to Reuters in August that a gradual hike in ultra-low rates will help boost Japan's profitability.
His comments, as well as his focus on pulling Japan fully out of economic stagnation, underscore the new administration's preference for the BOJ to go slow in hiking rates, analysts say.
Ishiba's newly-appointed economy minister, Ryosei Akazawa, also voiced hope on Wednesday that the BOJ would be cautious about raising rates further.
While the BOJ's current policy rate, at 0.25%, was "abnormal in global standards," Japan's priority was to "pull out of deflation," Akazawa said.
BOJ SET TO MOVE 'CAUTIOUSLY'
Speaking after the meeting with Ishiba, Ueda said he told the premier that the BOJ would move cautiously in deciding whether to raise interest rates further.
"I told the prime minister that we are supporting the economy with loose monetary conditions," Ueda said in his first meeting with Ishiba since he became prime minister.
Ueda added the BOJ will raise interest rates if economic and price developments move in line with its forecast.
"But I said we will adjust the degree of monetary support cautiously, as we can afford to spend time scrutinising (economic) developments," he said.
The BOJ ended negative rates in March and raised short-term borrowing costs to 0.25% in July on the view Japan was making progress towards durably achieving 2% inflation.
Ueda was forced to roll back his remarks, made when the BOJ hiked rates in July, that the bank would keep raising borrowing costs after the hawkish remarks triggered a market rout.
In a speech delivered on Wednesday before the meeting with Ishiba, Ueda said the BOJ will be "extremely" vigilant for the time being to economic fallout from unstable markets and global economic uncertainties.
The BOJ next reviews rates on Oct. 30-31, when the board also releases fresh quarterly growth and price forecasts. It holds another meeting in December.
"The remarks from Ishiba and Akazawa clearly sound negative against a near-term, additional rate hike. A rate hike in October is now out of the question," said Yoshimasa Maruyama, chief market economist at SMBC Nikko Securities.
"The hurdle for another rate hike by year-end has also risen," he said.