By Leika Kihara
TOKYO (Reuters) -Bank of Japan Governor Kazuo Ueda said the central bank will eventually scale back bond purchases and allow market forces to set long-term interest rate moves, signalling his resolve to move steadily towards normalising ultra-loose monetary policy.
The BOJ ended eight years of negative interest rates and other remnants of its unorthodox policy on Tuesday, making a historic shift away from decades of massive monetary stimulus that was aimed at reviving the economy and quashing deflation.
While the central bank also ditched its bond yield control, it pledged to maintain its monthly pace of bond purchases at roughly 6 trillion yen ($39.6 billion) for the time being.
"We've been intervening in the government bond market quite heavily. We would like to decrease our bond buying in the future," Ueda told parliament. "But for now, we'd like to take a wait-and-see approach to see how markets absorb our new policy."
Despite the historic policy pivot, expectations of prolonged ultra-low interest rates in Japan have pushed the yen to fresh multi-month lows, adding to headaches for policymakers worried about the hit to consumption from a renewed rise in imported fuel costs.
Finance Minister Shunichi Suzuki repeated his warning against sharp yen declines on Friday, saying that authorities were watching currency moves with "a high sense of urgency."
But he refrained on commenting on whether Tokyo could intervene in the currency market to stem the yen's declines.
At around 151.50 to the dollar, the yen is hovering around levels when Tokyo last intervened in the market to prop up the Japanese currency in 2022.
The yen's recent moves underscore the dilemma Japan faces. With the economy's recovery fragile, the BOJ is wary of signalling the chance of steady rate hikes.
By stressing its resolve to avoid fast-pitched rate hikes, however, the BOJ is helping fuel an unwelcome decline in the yen that pushes up the cost of imports.
Even after Tuesday's BOJ decision to end negative rates, Japanese borrowing costs are still stuck around zero.
The overnight call rate, which is now the BOJ's new short-term target rate, was quoted at 0.074%, having turned positive for the first time in eight years on Thursday.
More than a half of economists surveyed by Reuters expect the Bank of Japan will raise interest rates further this year, a poll showed on Friday, possibly taking them as high as 0.25%.
At Tuesday's news conference, Ueda has said the BOJ could hike rates again if inflation forecasts overshoot sharply, or if upside risks to the price outlook heighten significantly.
So far, the risk of a sharp inflation overshoot seems slim.
Core inflation accelerated in February but an index gauging the broader price trend slowed sharply, data showed on Friday, as food price rises moderated and services inflation steadied.
Wage developments also hold the key to the timing of Japan's next interest rate hike.
Japanese firms have agreed to raise pay by 5.25% this year, the biggest amount and ratio under comparable data available since 2013, the country's largest union group Rengo said on Friday.
($1 = 151.5700 yen)