By Leika Kihara and Tetsushi Kajimoto
TOKYO (Reuters) -Bank of Japan Governor Kazuo Ueda voiced confidence over prospects of higher wages and stressed the bank's resolve to phase out stimulus if inflation durably hits its goal, despite data showing the economy has slipped into recession.
But he said the central bank will closely watch the health of Japan's economy in timing an exit from its ultra-loose policy, especially annual labour-management wage talks that will conclude in mid-March for big firms.
"Once a positive wage-inflation cycle kicks off and sustained achievement of our price target comes into sight, we will examine whether or not to sustain our massive stimulus measures, including negative interest rates," Ueda said.
"We'd like to scrutinise whether Japan's economy continues to recover moderately, and whether a positive wage-inflation cycle would be sustained," he told parliament on Friday, when asked by a lawmaker on how Thursday's weaker-than-expected GDP data could affect the timing of an exit.
Ueda's remarks follow data on Thursday that showed Japan's economy unexpectedly slipped into a recession in the final quarter of last year on sluggish consumption and capital expenditure.
Sources have told Reuters that the BOJ is on track to end negative rates in coming months despite the economy's fragility, as policymakers focus more on growing prospects of solid wage increases.
With inflation having exceeded the BOJ's 2% target for some time, many market players still expect the central bank to end its negative interest rate policy by April.
Ueda said Japan's real inflation-adjusted wages will likely turn positive as a tightening job market pushes up pay, and the effect of past surges in import costs dissipate.
"Our inflation forecast for fiscal 2025 is currently at 1.8%. We expect wages to rise slightly more than that," Ueda said, maintaining his optimism that higher wages will boost consumption and help keep inflation sustainably around 2%.
He also repeated that Japan's monetary conditions will likely remain accommodative even after the central bank ends negative rates.
Such reassurances from BOJ officials over prolonged low rates have accelerated fresh declines in the yen, which has become a source of concern for policymakers worried about the hit to consumption from rising import prices.
In a fresh warning against excessive yen declines, Finance Minister Shunichi Suzuki said that while a weak yen has merits and demerits, he was "more concerned" about the negative aspects of a weak currency.
"Currency rates are set by markets reflecting fundamentals. Rapid moves are undesirable and stable moves are desirable," Suzuki told the same parliament session.
The yen weakened 0.22% to 150.26 per dollar on Friday, hovering around the 150 mark that puts the market on alert for possible intervention by Japan to slow the currency's declines.
The International Monetary Fund said on Thursday its 2023 economic growth forecast for Japan remained unchanged at 1.9% even after the release of the weak October-December GDP data.