By Leika Kihara and Tetsushi Kajimoto
TOKYO (Reuters) - Bank of Japan Governor Kazuo Ueda on Thursday vowed to keep supporting the economy with ultra-loose monetary policy but signalled confidence inflation was gaining momentum, as markets look for clues on the next interest rate hike timing.
He also said the central bank would eventually scale back its huge balance sheet, signalling that the BOJ would move slowly but steadily towards normalising monetary policy.
His comments come after the BOJ on Tuesday ended eight years of negative interest rates and other remnants of its unorthodox policy, in a historic shift away from the massive monetary stimulus of past decades.
"As we exit our massive stimulus programme, we will gradually shrink the size of our balance sheet and at some point reduce the size of our government bond buying," Ueda said.
In his first appearance in parliament since the decision, Ueda was grilled by a lawmaker on whether the move was made too hastily and could derail Japan's fragile economic recovery.
"We could have waited until inflation is completely at 2% for a long period of time. But if we did so, it's unclear whether inflation would have stayed at 2%. We might have seen a sharp increase in upside price risks," Ueda replied.
Continued rises in service prices, and big pay hikes offered by major firms in annual wage talks, confirmed that Japan was seeing a positive cycle of rising wages and inflation strengthen, he said.
But Japan's medium- and long-term inflation expectations are "still in the process of accelerating towards 2%," Ueda said.
"As such, we will support the economy and prices by maintaining accommodative monetary conditions for the time being," he said.
Expectations that the BOJ will go slow in any further rate hikes have pushed the yen beyond 150 to the dollar, a level seen by markets as heightening the chance of yen-buying intervention by Japanese authorities.
The yen rose to 150.63 per dollar in Asia on Thursday, after having slumped to a four-month trough of 151.82 in the previous session.
The yen's declines triggered warnings from Japanese policymakers including Finance Minister Shunichi Suzuki, who told reporters on Thursday that the government was watching currency moves "with a high sense of urgency."
"It is important for currencies to move stably reflecting fundamentals," Suzuki said. He made no comment, when asked by a reporter about the possibility of currency intervention.
Japan last intervened in the currency market in October 2022 to prop up the yen, when it slid toward a 32-year-low near 152 to the dollar.
At Tuesday's post-meeting briefing, Ueda said the BOJ could hike rates if inflation overshoots expectations or upside risks to the price outlook heighten significantly.
A majority of Japanese firms expect the BOJ to lift rates further this year, a Reuters survey showed.
The market's focus will shift to upcoming data for clues on whether the economy will strengthen enough to allow the central bank to keep raising rates.
Data released on Thursday showed Japan's exports grew for a third straight month in February on solid auto demand in the United States.
Confidence at big Japanese companies also improved in March from the previous month, a Reuters survey showed, though manufacturers' mood worsened slightly from three months ago.