Derivatives are pricing in about a 95 percent chance of a Japanese rate hike by the end of this year, up from less than half earlier in the week. They are also pricing in a roughly 65 percent chance of two rate rises to 1.0 percent over the next year.
While the BOJ sees rising public awareness of inflation as a risk, a rate hike would become an option only if inflation expectations begin to feed on themselves and prices of a wide range of goods shoot up on strong demand, BOJ sources said.
The BOJ had been working towards "normalizing" rates in Japan, its parlance for raising the country's very low rates to more normal levels after nearly a decade of deflation.
But the U.S. subprime housing loan crisis has forced the central bank to take a more neutral stance lately.
Economists expect rising energy and food prices to push up Japan's annual inflation, which stood at 0.9 percent in April, to near 1.5 percent or even 2 percent by later this year.
Some within the BOJ believe there is now a bigger chance for the rise in core consumer prices to overshoot the bank's forecast of 1.1 percent in the fiscal year ending next March 31.
Annual wholesale inflation hit a 27-year high of 4.7 percent in May, data showed on Wednesday, with pressure on companies from spikes in costs of materials.
Even so, inflation is less a problem in Japan than in other parts of the world such as the euro zone, where it hit a record 3.6 percent in May.
Japanese companies are only slowly passing on rising raw material costs in the prices of their goods as tame wage growth keeps consumers' purse strings tight.
Weakness in the economy remains the BOJ's immediate concern, particularly with higher raw materials costs hurting corporate activity, the key driver of Japan's economy.
Japan's first-quarter growth was revised up to 1 percent this week from a preliminary estimate of 0.8 percent, but economists warn of a downturn this year on concern that the deepening U.S. economic troubles will spread.