Bank of Japan Governor Toshihiko Fukui tried today to calm market expectations of an early rate hike, saying the central bank will keep rates near zero for a while despite ending its ultra-easy policy framework last week.
He told a parliamentary committee it is still too soon to consider rate hikes, triggering a rise in Japanese government bond futures and a fall in the yen.
"It is too early to discuss when to end the zero interest rate policy, as we have only just ended our quantitative easing framework," he said.
"We will not immediately head towards tightening."
The central bank last Thursday scrapped its five-year-old policy of flooding the banking system with excess cash, or quantitative easing, but kept short-term interest rates near zero per cent.
Financial markets had been expecting the BOJ to raise rates around the final quarter of 2006, but bullish comments on the economy by Fukui and hawkish policy remarks by BOJ board member Atsushi Mizuno recently triggered speculation of an earlier move.
Finance Minister Sadakazu Tanigaki said he hoped the BOJ would keep in mind movements in long-term interest rates and adopt an "appropriate" policy.
Chief Cabinet Secretary Shinzo Abe, the government's top spokesman, told a separate news conference the BOJ should look at various data in deciding whether the economy has emerged from deflation.
Fukui said rates would likely stay low as long as inflation remained subdued.
"If it is judged that upward pressure on prices is contained as the economy remains on a steady growth path, there is a high possibility that an accommodative monetary environment with very low interest rates will probably stay for some time," he said.
"We will continue to support the economy with an accommodative environment."