Bank of Japan Governor Kazuo Ueda said Monday that Japanese companies have become more proactive in setting prices and wages, and the likelihood of attaining the central bank's 2 percent inflation target is "gradually rising."

Ueda made the remarks after the BOJ last week stuck to its ultralow rates but decided to allow long-term government yields to rise above its previously rigid ceiling of 1.0 percent to reduce side effects.

In a speech to business leaders in Aichi Prefecture, central Japan, Ueda acknowledged he could not foresee the stable and sustainable achievement of the inflation target "with sufficient certainty."

Bank of Japan Governor Kazuo Ueda delivers a speech on Nov. 6, 2023, in Nagoya, Aichi Prefecture, at a meeting with local business leaders. (Kyodo) 

"It is necessary to closely examine whether changes in firms' wage- and price-setting behavior will become widespread and the virtuous cycle between wages and prices will intensify," Ueda said.

The BOJ's "basic thinking on the conduct of monetary policy is that it will patiently continue with monetary easing under the framework of yield curve control, aiming to support Japan's economic activity and thereby facilitate a favorable environment for wage increases," he added.

Under the yield curve control program, short-term interest rates are set at minus 0.1 percent and 10-year yields are guided to around zero percent.

The latest tweak to the program was the strongest signal yet the dovish central bank is also preparing to unwind the massive monetary stimulus that it has pursued over a decade or so when the inflation goal comes into view.

While 10-year yields will be allowed to rise further to reflect economic fundamentals, Ueda reiterated he does not expect them to rise significantly above 1.0 percent.

"The bank will continue with large-scale (bond) purchases and, in a phase of rising interest rates, will keep making nimble responses through market operations depending on factors such as the levels and the pace of change in long-term interest rates," he said.

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