Bank of Japan Governor Kazuo Ueda on Friday warned of the "extremely high" cost of premature monetary tightening that would dampen prospects of attaining a stable 2 percent inflation rate, as he made his case for persisting with the current ultralow rate policy.

Regarding the possibility of tweaking the central bank's yield cap program, blamed for distorting bond markets, Ueda said at an event he will carefully weigh the pros and cons of the central bank's policy steps.

Financial markets speculate that the BOJ will need to modify or scrap its program to keep borrowing costs extremely low to support the economy through government bond-buying. The country's inflation rate has remained above the target of 2 percent for over a year, adding pressure on the dovish BOJ to tweak its policy.

"The cost of impeding the nascent developments toward achieving the 2 percent price stability target, which is finally in sight, by making hasty policy changes, would likely be extremely high," Ueda said in his speech at a gathering of the Research Institute of Japan.

The BOJ chief added that the cost of waiting for underlying inflation to move toward 2 percent is not as high as prematurely tightening monetary policy.

"It is appropriate to take time to decide on adjustments to monetary easing toward a future exit," he said.

Under its yield curve control program, short-term interest rates are set at minus 0.1 percent, while 10-year Japanese government bond yields are guided to around zero percent.

Ueda said consumer inflation will start to slow later this year as the effects of rising import costs, amplified by a weak yen, will dissipate.

While the outcome of recent annual wage negotiations between labor unions and management is encouraging, he said the central bank wants to see if wage growth will continue and further spread to smaller firms so its inflation target can be attained stably.

Bank of Japan Governor Kazuo Ueda delivers a speech in Tokyo on May 19, 2023. (Pool photo)(Kyodo)

Big companies have agreed to raise pay by an average of 3.91 percent during their "shunto" negotiations, the sharpest gain since 1992, according to the Japan Business Federation, known as Keidanren.

"There is extremely high uncertainty over the sustainability of wage hikes, consumption and overseas economies," Ueda said, adding that it is necessary to persist with monetary easing.

At his first policy-setting meeting since becoming governor in April, the BOJ decided to conduct a broad review of monetary policy taken over a quarter century. Still, he has ruled out that the review, likely to take up to 18 months, is linked to any specific policy change for now.

"The multidimensional review will not be limited to specific areas. But we are not going to carry out the review based on the premise that the price stability target should be revised," Ueda said.

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