Photo/Illutration Japanese national flag is hoisted atop the headquarters of Bank of Japan in Tokyo on Sept. 20, 2023. (REUTERS/ File Photo)

The Bank of Japan kept interest rates steady on Friday and revised up its assessment on consumption, signaling its confidence a solid economic recovery would allow the central bank to raise interest rates again in coming months.

As widely expected, the BOJ held short-term interest rates steady at 0.25% at its two-day meeting but noted improving domestic conditions, which help shore up the case to continue unwinding years of extraordinary monetary stimulus.

"Private consumption has been on a moderate increasing trend despite the impact of price rises and other factors," the BOJ said in a statement announcing the decision.

The assessment was more optimistic than the previous view that consumption was resilient.

"Our decision on monetary policy will depend on economic, price and financial developments at the time," BOJ Governor Kazuo Ueda said at a press conference after the meeting.

"Japan's real interest rates remain extremely low. If our economic and price forecasts are achieved, we will raise interest rates and adjust the degree of monetary support accordingly."

The BOJ ended negative interest rates in March and hiked short-term rates to 0.25% in July, in a landmark shift away from a decade-long stimulus program aimed at firing up inflation.

The yen pared losses and the Nikkei average saw gains shrink after the announcement, as the BOJ's upbeat view on the outlook kept alive market expectations of a near-term rate hike.

"The upgrade in the BOJ's consumption assessment shows it is becoming increasingly convinced that things are on track, with rising wages pushing up household income and spending," said Naomi Muguruma, chief bond strategist at Mitsubishi UFJ Morgan Stanley Securities.

"If upcoming data further underscores the BOJ's optimism, we'll likely see another rate hike in December," she said.

INFLATION ACCELERATES

Ueda has stressed the BOJ's readiness to raise rates further if inflation remains on track to durably hit its 2% target, as the board currently projects.

His hawkish comments contrast with the postures of many other central banks, which are shifting to rate-cut cycles. The U.S. Federal Reserve delivered an oversized reduction in borrowing costs on Wednesday.

A majority of economists polled by Reuters expect the BOJ to raise rates again this year, with most betting on a December hike. None in the poll projected a rate increase this month.

Core consumer inflation hit 2.8% in August to accelerate for the fourth straight month, data showed on Friday, keeping alive expectations for further rate hikes.

The chance to check data against its projections more carefully would come at the BOJ's Oct. 30-31 meeting, when the board will conduct a quarterly review of its forecasts.

Japan's economy expanded an annualized 2.9% in April-June and real wages rose for two straight months in July, easing fears that rising living costs will dent consumption.

But soft demand in China, slowing U.S. growth and the yen's recent rebound cloud the outlook for the export-reliant country.

Market volatility remains a key concern for BOJ policymakers after the July rate hike and hawkish remarks from Ueda triggered a spike in the yen and sharp falls in equity prices.

Several BOJ policymakers have called for scrutinizing market moves in setting policy. But they also reiterated the bank's readiness to keep raising rates, with one hawkish board member saying short-term rates must eventually go up to around 1%.

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