The Bank of Japan maintained ultra-low interest rates on Thursday but said risks around the U.S. economy were somewhat subsiding, signalling that conditions are falling into place to raise interest rates again.

The central bank also projected inflation would move around its 2% target in the coming years, stressing its resolve to keep raising borrowing costs if the economy sustains a moderate recovery.

"Looking at domestic data, wages and prices are moving in line with our forecasts. As for downside risks to the U.S. and overseas economies, we're seeing clouds clear a bit," Governor Kazuo Ueda told a news conference.

Ueda's remarks were less dovish than those made before Thursday's meeting that the BOJ can "afford to spend time" scrutinizing the fallout from risks such as U.S. economic uncertainties and volatile financial markets.

The dollar briefly fell to 151.92 yen from levels above 153 yen after Ueda's remarks, which were interpreted as heightening the chance of a rate hike in December.

"As for the timing of the next rate hike, we have no preset idea. We will scrutinize data available at the time of each policy meeting, and update our view on the economy and outlook, in deciding policy," Ueda told the news conference.

As widely expected, the BOJ kept short-term interest rates at 0.25% at its two-day meeting, its first since an inconclusive general election that analysts say will complicate efforts to normalize interest rates after years of ultra-easy policy.

NEW RISKS MAY EMERGE

The BOJ had said it could "afford to spend time" scrutinizing risks after its rate hike in July, and weak U.S. jobs data, triggered a sharp yen spike and a global market rout.

Markets have restored some calm since then, as a slew of robust data diminished market fears of a U.S. recession.

"When we used language that we can 'afford to spend time' gauging risks, weak U.S. jobs data led to volatile market moves, which we saw as having a grave impact on Japan's economy," Ueda said. "Since then, we have seen some fairly good U.S. data."

But Ueda stressed the need to stay vigilant to overseas and market developments, saying new risks could emerge depending on who becomes the next U.S. president at the Nov. 5 election.

"Ueda's remarks sounded somewhat hawkish," said Hiroshi Watanabe, senior economist at Sony Financial Group.

"Many market players had bet that the next rate hike will come in the January-March quarter next year. But he sounded as if he left open the chance of a December hike," he said.

The BOJ next meets for a policy meeting on Dec. 18-19, followed by another meeting on Jan. 23-24.

In its quarterly outlook report, the BOJ repeated that it expects underlying inflation to converge around 2% sometime around late 2025 or beyond, as service prices continue to rise moderately.

The board cut its core consumer inflation forecast for fiscal 2025 to 1.9% from 2.1% in the previous estimate in July, but said risks were skewed to the upside for that year. It kept unchanged its fiscal 2026 core inflation forecast at 1.9%.

"If we see wages rise at around the same level of this year, that would be a positive development for us," Ueda said when asked about prospects for next year's wage talks between firms and unions. "But that alone won't directly lead to rate hikes."

The BOJ ended negative rates in March and raised short-term rates to 0.25% in July on the view Japan was making progress towards sustainably achieving its 2% inflation target.

Ueda has repeatedly said the BOJ will keep raising rates if the economy moves in line with its forecast.

The ruling coalition's loss of a majority in a weekend election has heightened concerns about policy paralysis, which could raise the hurdle for additional rate hikes, analysts say.

"Recent political developments alone won't directly affect our price forecasts," Ueda said. "But if there are big changes in policy, we will revise our forecasts as needed taking into account the impact of such moves."

A slim majority of economists polled by Reuters on Oct. 3-11 expected the BOJ to forgo a hike this year, though most expect one by March.

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Following are excerpts from BOJ Governor Kazuo Ueda's comments at his post-meeting news conference, which was conducted in Japanese, as translated by Reuters:

NEXT RATE HIKE

"As for the timing of the next rate hike, we have not preset idea. We will scrutinize data available at the time at each policy meeting, and update our view on the economy and outlook, in deciding policy."

ON U.S. ECONOMY

"We have seen some positive U.S. data recently. But there is still uncertainty on how past rate hikes by the Fed affect the economy and prices. We need to monitor developments carefully.

"When we used language that we can 'afford to spend time' gauging risks, weak U.S. jobs data led to volatile market moves, which we saw as having a grave impact on Japan's economy, more so than other data.

"Since then, we have seen some fairly good U.S. data. We are still not completely confident about the U.S. outlook, which is why we added a line in the report's policy guidance.

"If U.S. developments continue to improve, this risk will subside to the level of other risks."

BROADENING PASS-THROUGH OF RISING WAGES

"When we look at the latest Tokyo CPI data, there are signs the pass-through of rising wages on services prices is broadening. We'd like to scrutinize whether such broadening will happen at the nationwide level."

WAGES AND PRICES

"Looking at domestic data, wages and prices are moving in line with our forecast. As for downside risks to the U.S. and overseas economies, we're seeing clouds clear a bit.

"Risks surrounding the U.S. economy are subsiding since summer. But there are other risks, so we are not 100% sure of our baseline scenario. We can only begin to take the next step when such confidence heightens further."

RISK BALANCE SURROUNDING JAPAN'S INFLATION

"We've seen companies' price and wage-setting behavior start to change in the past two years. It's uncertain whether this trend will strengthen or peter. The impact of currency volatility and commodity price moves on domestic import prices is also key."

WAGE GROWTH AND RATE HIKE CHANCES

"If we see wage hikes around the same level of this year's, that would be a positive development for us. But that alone won't directly lead to rate hikes."

DOMESTIC POLITICAL UNCERTAINTY AND BOJ POLICY

"Recent political developments alone won't directly affect our price forecasts. But if there are big changes in policy, we will revise our forecasts as needed taking into account the impact of such moves."