By Leika Kihara and Takahiko Wada
TOKYO/NAHA, Japan (Reuters) -Bank of Japan (BOJ) board member Asahi Noguchi said on Thursday the central bank must maintain ultra-loose monetary policy to ensure wages, seen as key to driving inflation to its 2% target, continue to increase as a trend.
Noguchi said core consumer inflation, which has remained above 2% for more than a year, will likely fall below that level around September or October as the effect of past rises in raw material costs dissipates.
Whether inflation bounces back above 2% and stays above that level will depend on the outlook for wages and services prices, said Noguchi, who is considered an advocate of aggressive monetary easing in the nine-member board.
"What's most important now is for the BOJ to maintain monetary easing and ensure budding signs of wage growth become a sustained, strong trend," he said in a speech delivered to business leaders in Naha, southern Japan.
The remarks echo those of fellow board member Seiji Adachi on Wednesday, and underscore the BOJ's caution over dialing back its massive stimulus programme too hastily.
While firms offered the largest pay hikes in three decades this year, wage rises need to continue for inflation to sustainably hit 2%, Noguchi told a news conference after the meeting with business leaders.
"Nominal wages must rise at a pace faster than the BOJ's 2% target" for inflation-adjusted real wages to increase, and give households more purchasing power, he added.
Under yield curve control (YCC), the BOJ sets a -0.1% target for short-term interest rates and caps the 10-year bond yield around 0% to reflate growth and inflation.
With inflation exceeding its target, markets are simmering with speculation the BOJ will soon tweak YCC due to criticism the policy is distorting market pricing and crushing financial institutions' profit margins.
Some market players bet the central bank could widen the allowance band set around the 10-year yield target again, after doing so once in December, if a renewed rise in global long-term interest rates put upward pressure on Japanese yields.
Noguchi, however, said he saw no need to make operational tweaks to YCC for the time being, saying there were no clear distortions in the shape of the yield curve.
The BOJ next meets for a policy meeting on July 27-28, when it releases fresh quarterly growth and inflation forecasts.