BOJ's Ueda 'very likely' to hike rates if Japan prices keep rising

WASHINGTON (Reuters) -- Bank of Japan Gov. Kazuo Ueda on Friday said the central bank "very likely" will raise interest rates if underlying inflation continues to climb and begin reducing its huge bond-buying operations at some point in the future.

The central bank must maintain loose monetary policy for the time being as underlying inflation remains "somewhat below" its 2% target, and long-term inflation expectations are still near 1.5%, Ueda said.

Having ended its various unconventional monetary easing measures in March, however, the BOJ has brought more flexibility to its policy and may change its short-term interest rate target depending on upcoming data, he added.

"We will proceed cautiously, initially assessing the impact of our recent policy changes on the economy and inflation, then considering further adjustment as deemed appropriate, perhaps extracting insights on the neutral rate along the way," Ueda told a seminar hosted by the Peterson Institute for International Economics.

The BOJ will also begin to cut its purchases of Japanese government bonds (JGBs), though the timing and extent of the reduction are yet to be determined, Ueda said.

"Irrespective of what the data will say in the near future, we will like to find a way and timing to reduce the amount of JGB purchases," he said, adding that the central bank will take time to reach a decision.

The remarks reinforce market expectations that the BOJ will raise its short-term interest rate target from the current 0-0.1% range sometime this year.

In March, the BOJ ended eight years of negative interest rates and other remnants of its unorthodox policy, making a historic shift away from its focus on reviving growth and quashing deflation with decades of massive monetary