By Leika Kihara

TOKYO (Reuters) -Bank of Japan (BOJ) Governor Kazuo Ueda on Tuesday stressed the need to keep monetary policy ultra-loose for now, but signalled the chance of raising interest rates if inflation and wage growth overshot expectations.

“In light of current economic, price and financial developments, it’s appropriate to maintain monetary easing, now conducted through yield curve control,” Ueda told parliament.

The shape of Japan’s bond yield curve has normalised due in part to falling global yields, Ueda said, when asked by an opposition lawmaker about the demerits of prolonged monetary easing.

Ueda reiterated the need to keep Japan’s monetary policy loose to achieve the BOJ’s 2% inflation target in a sustainable, stable fashion accompanied by wage hikes.

“But if wage growth and inflation accelerates faster than expected and warrants tightening monetary policy, the BOJ stands ready to respond such as by raising interest rates,” he said.

Ueda’s comments come ahead of the BOJ’s two-day policy meeting that kicks off on Thursday, which will be the first meeting he chairs since taking the helm earlier this month.

At the meeting, the BOJ is expected to keep unchanged its monetary settings and dovish policy guidance to support a fragile economic recovery and budding signs of wage growth.

Markets are rife with speculation Ueda will steer the BOJ toward phasing out his predecessor Haruhiko Kuroda’s massive stimulus, which drew criticism for distorting market pricing and crushing financial institutions’ profits.

In a sign he was in no rush to hike rates, Ueda said tightening monetary policy now could push down future inflation, which is already seen slowing as import costs peak.

“We could see inflation further undershoot expectations, which would be very worrying,” Ueda said.

The BOJ must guide policy keeping in mind that it takes a long time for changes in monetary settings to affect demand and prices, he added.

“We see the risk of inflation undershooting forecasts as bigger than the risk of overshooting,” he said, stressing the need to maintain the BOJ’s massive stimulus for now.

Under yield curve control (YCC), the BOJ guides short-term rates at -0.1% and the 10-year bond yield around 0% with an implicit cap set at 0.5%.

(Reporting by Leika Kihara; Editing by Christopher Cushing and Sam Holmes)

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