Bank of Japan Governor Kazuo Ueda avoided giving a clear signal that he might raise interest rates next month, sticking to his view that the bank needs to continue monitoring risks to the economy in comments that weighed on the yen.

"The timing and pace of adjusting the degree of monetary accommodation will depend on developments in economic activity and prices as well as financial conditions going forward," Ueda said in a speech at a business conference in Tokyo on Wednesday.

"The bank needs to pay attention to various risk factors at home and abroad, and to examine how these factors will affect the outlook and risks to Japan's economic activity and prices and the likelihood of those outlooks materializing," he said.

The speech came after Ueda indicated last week that the BOJ might wait longer before raising interest rates, a view that surprised investors who had been expecting a move in January if the bank did not act at its December meeting. The unexpected dovish stance triggered a drop in the yen and a warning from Japan's finance ministry about unilateral and speculative currency moves.

Ueda on Wednesday appeared to keep his options open, noting the need to keep interest rates low to support the economy while at the same time flagging the risks of keeping rates low for too long.

The yen weakened to 157.37 against the dollar following his comments in Tokyo from around 157.13 at the start of his speech. The move suggested further recalibration toward future rate hikes among market players. However, the speed of the move suggests little immediate chance of the yen breaking through a five-month low of 157.93 hit last week, or the kind of move that might trigger further currency intervention by Japan.

As Japan transitions toward achieving stable 2% inflation, the BOJ will maintain easy financial conditions by keeping interest rates lower than the neutral level to firmly support the economy, Ueda said. "We must ensure that the Japanese economy does not return to a deflationary or low-inflation environment," he said.

The BOJ kept its benchmark interest rate unchanged at 0.25% at its December policy meeting. In a speech Wednesday, Ueda said he had a lot to watch, indicating he wanted to see more data to gauge momentum in the annual spring wage talks and the outlook for the U.S. economy.

"With regard to the Japanese economy, the key issue in the near term is how the annual spring labor-management wage negotiations will develop," Ueda said.

The BOJ raised interest rates in March for the first time in 17 years just days after the release of preliminary results of this year's annual wage talks between the country's largest labor union federation and employers.

However, some economists and policymakers already feel the country is ready for another rate hike. Japan's inflation has held at or above the BOJ's target for two and a half years and the economy has continued its moderate recovery. Ahead of last week's policy meeting, about 86% of BOJ watchers said economic conditions warranted a rate hike at the meeting.

Naoki Tamura, a hawkish member of the BOJ's policy board, called for a rate hike last week. He cited an economy that remained in line with the BOJ's projections and rising upside risks.

Raising rates could also ease pressure on the yen, which is near levels that prompted government intervention in the market earlier in the year. Tokyo has spent nearly $100 billion to prop up the currency so far this year.

Concerns about Prime Minister Shigeru Ishiba's minority government gaining support for its annual budget may be one factor keeping central bank policymakers cautious about raising rates for now. A small opposition party that Ishiba had hoped would back the ruling party's budget plan has not fully backed the initial proposal. Traders saw a 46% chance of a rate hike in January as of Wednesday with an 82% chance of a March increase, according to the latest overnight index swap rates.

This was Ueda's last scheduled public speech in 2024. The BOJ board meets again to deliver its next policy decision on Jan. 24.

Source: Bloomberg