By Leika Kihara

TOKYO (Reuters) -Bank of Japan Governor Kazuo Ueda said the country’s corporate price-setting behaviour was showing changes that could work to push up inflation more than expected, suggesting the economy was making steady progress toward hitting its 2% price target.

But he stressed anew the central bank’s resolve to keep ultra-loose policy, to ensure companies raise wages enough to more than offset the burden on households from rising inflation.

“There’s still some distance to sustainably and stably achieve our 2% inflation target. As such, we will patiently maintain our monetary easing policy,” Ueda told parliament.

By supporting the economy, the central bank aims to generate a positive cycle in which inflation-adjusted wages will start increasing, he added.

The BOJ is expected to maintain ultra-loose policy next week, sources have told Reuters, as it focuses on supporting a fragile economic recovery to sustainably hit its price goal.

Japan’s core consumer inflation hit 3.4% in April, exceeding the BOJ’s 2% target for over a year, as companies continued to pass on rising raw material costs to households.

Inflation-adjusted real wages fell 3.0% in April to mark the 13th straight month of declines in a sign the rising cost of living was squeezing households’ purchasing power.

The economy has held up so far, expanding by an annualised 2.7% in the first quarter on robust capital expenditure.

In a positive sign for consumption, average summer bonus payments this year are likely to rise 2.4% from year-before levels, think tank Teiko Data Bank said on Friday.

But there is uncertainty about whether companies will keep raising wages, after agreeing with unions to hike pay at levels unseen in 30 years.

Ueda said the BOJ currently expects core consumer inflation to slow below the bank’s 2% target in the latter half of the current fiscal year.

“But there is various uncertainty surrounding the inflation outlook. What’s important is corporate price-setting behaviour, which is somewhat overshooting expectations,” he said.

With inflation exceeding the BOJ’s target, markets are simmering with speculation that Ueda will phase out his predecessor’s massive stimulus that has drawn criticism for distorting markets and crushing bank profits.

(Reporting by Leika Kihara; editing by Sonali Paul and Jason Neely)

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