The Bank of Japan still has its sights set on higher interest rates in the future, although it will pursue a flexible policy looking at developments in Japan's economy and global markets, two members of the central bank's policy board said on Thursday.
Miyako Suda, seen as hawkish, said it was natural for the bank to consider hiking rates from the current 0.5 percent because monetary conditions are already very accommodative.
New Deputy Governor Kiyohiko Nishimura, generally seen as moderately dovish, meaning less inclined to raise rates, delivered a similar message, saying the bank will maintain its stance of gradually raising rates as long as the economy is seen growing.
But both said the BOJ needs to closely monitor global markets, which remain jittery on worries that the United States may be heading into a recession, which could curb Japanese growth.
"It is time to carefully examine both upside and downside risks without preconceptions as financial markets are unstable and a dense fog is clouding the outlook," " Suda said in a speech to business leaders in Miyazaki, southern Japan.
Suda also said there is now a higher chance of Japanese economic growth slowing near its potential, seen somewhere between 1.5 and 2 percent, in the fiscal year from April 1.
She warned that the BOJ needs to guard against inflation risks because if inflation expectations heighten it would reduce the effect of a rate cut by raising the cost of borrowing.
Financial markets did not react much to the comments by board members.
Markets still see about a 20 percent chance of a rate cut by June, although many economists do not see a large possibility of either a rate rise or cut in the near term.
"Market players are looking for clues to whether the BOJ will cut rates. Although many are betting on no rate cuts anytime soon, the chance of a rate cut is not zero either," said Masaaki Kanno, chief Japan economist at JPMorgan Securities.
"None of the BOJ members gave clues on whether the BOJ will cut rates, sticking to the bank's basic stance of raising rates back to normal levels," he said.
Some economists say Japan could follow the U.S. economy into recession although a majority of economist expect Japan to narrowly avoid one.
On recent market developments, Suda said the yen's recent rises could stifle Japan's growth by hurting sentiment. The dollar fell to a 13-year low below 96 yen earlier this month.
"The effect (of the yen's rise) on smaller firms' already weak revenues and capital spending plans is particularly worrying," she said.
Nishimura, speaking in parliament, warned there was a high degree of uncertainty over the economy. "It's important to take steps flexibly without preconceptions after analysing risks and the chances of the outlook becoming a reality," he said.
BOJ Acting Governor Masaaki Shirakawa, who also briefly appeared in parliament, said the bank will discuss the impact of the global credit mess and the ongoing slowdown in the U.S. economy on Japan at its policy meetings next month.
The BOJ, without a full-time governor after parliament vetoed the government's two nominees for the job, will hold its next policy meeting on April 8-9 and another meeting on April 30.