Bank of Japan governor Toshihiko Fukui yesterday kept alive speculation that a change to the nation's ultra-loose monetary policy is close, saying the economy was in an "important phase."
Prime Minister Junichiro Koizumi, however, reiterated the government's position that Japan is not yet completely out of deflation, supporting the view of some economists that the Bank of Japan will not move until next month.
The Bank of Japan chief noted that the central bank has pledged to tighten its monetary policy if the consumer price index shows a consistent year-on-year reading of zero or higher.
"We are entering an important phase as the situation surrounding the economy and prices is heading toward a favorable direction," Fukui told the upper house of parliament's budget committee.
The Bank of Japan must make "an objective decision," he added. "We want to support [the Japanese economy] by implementing monetary policies in an appropriate way at an appropriate time."
There is growing speculation that the central bank will soon announce an end to its ultra-loose monetary policy of flooding the banking system with virtually free credit, possibly even at the end of a two-day meeting on Thursday.
Expectations are also rising that the Bank of Japan will start actually raising interest rates by the end of the year.
At the parliament session, however, Koizumi signalled he still believes it may be too early to end the current policy.
"Frankly speaking, I don't think we can say we have departed from deflation," he said.
But Koizumi hinted that he may not interfere in the central bank's decision, saying: "Since the Bank of Japan governor is a wise person, I think he will make a wise decision."
The government is concerned that a premature move by the central bank could jeopardize the economic recovery and tip Japan back into deflation.
However, it now appears to have accepted that a change is fast approaching after core consumer prices increased 0.5 percent in January from a year earlier, the fastest pace since March 1998.
"Monetary policy is a matter for the Bank of Japan," Chief Cabinet Secretary Shinzo Abe told reporters earlier in the day.
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