Incoming Bank of Japan (BOJ) Governor Kazuo Ueda said on Friday it was appropriate to maintain ultra-loose monetary policy as inflation has yet to sustainably and steadily meet the central bank's 2% target.
Ueda said the recent rise in consumer inflation was driven mostly by surging import costs of raw material, rather than strong domestic demand.
"It's standard practice to act pre-emptively to demand-driven inflation, but not respond immediately to supply-driven inflation. Otherwise, the BOJ will be cooling demand, worsening the economy and pushing down prices by tightening monetary policy," Ueda told the lower house confirmation hearing.
"Japan's trend inflation is likely to rise gradually. But it will take some time for inflation to sustainably and stably achieve the BOJ's 2% target," he said.
"It's true there are various side-effects emerging from the stimulus. But the BOJ's current policy is a necessary, appropriate means to achieve 2% inflation."
Earlier this month, the government named the 71-year-old academic as its pick to become next central bank governor in a surprise choice that markets saw as heightening the chance of an end to the unpopular yield curve control policy.
With inflation exceeding the BOJ's 2% target, Ueda faces the delicate task of phasing out YCC, which has drawn public criticism for distorting market functions and crushing banks' margins.
Upon approval by parliament, he will succeed incumbent Haruhiko Kuroda, whose second, five-year term ends on April 8.
The government's deputy governor nominees — former banking watchdog head Ryozo Himino and BOJ executive Shinichi Uchida — will testify in the afternoon after Ueda.
The upper house of parliament will hold the confirmation hearing for Ueda on Monday, and that for the two deputies on Tuesday.
The nominations need the approval of both chambers of the Diet, which are effectively done deals as the ruling coalition holds solid majorities in both.
Under YCC, the BOJ guides short-term interest rates at -0.1% and the 10-year bond yield around 0% as part of efforts to sustainably achieve its 2% inflation target.
Under pressure from rising global interest rates, the BOJ was forced to raise in December the implicit cap for its 10-year yield target to 0.5% from 0.25% — a move that fueled market expectations of a near-term tweak to YCC.