BOJ signals no rush in raising rates again, keeps policy steady

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BOJ keeps short-term rate steady at 0.25% as expected

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BOJ upgrades view on consumption

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Gov Ueda says domestic economy on track, warns of U.S. risk

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Remarks weaken yen, heighten uncertainty on rate hike timing

(Adds BOJ governor's comments, context)

By Leika Kihara and Kantaro Komiya

TOKYO, Sept 20 (Reuters) -

The Bank of Japan kept interest rates steady on Friday and its governor said it could afford to spend time eyeing the fallout from global economic uncertainties, signalling it was in no rush to raise borrowing costs further.

The dovish comments pushed down the yen, heightening uncertainty over whether the BOJ could hike interest rates again this year, as many market players had predicted.

BOJ Governor Kazuo Ueda said Japan's economy was moving in line with forecasts, with rising wages lifting consumption, and keeping inflation on track to durably hit the bank's 2% target.

But volatile financial markets and uncertainty over whether the U.S. economy can manage a soft landing required the BOJ to spend more time determining whether more rate hikes were needed, he said.

"The outlook for overseas economic development is highly uncertain. Markets remain unstable. We need to scrutinise such developments carefully for the time being," Ueda told a news conference after the BOJ's widely expected decision to keep short-term rates steady at 0.25%.

The yen's recent rebound has also moderated upward pressure on import costs, and diminished the risk of an overshoot in domestic inflation, he said. "As such, we can afford to spend some time in making a policy decision."

The dollar jumped above 143 yen after Ueda's remarks on relief he did not give strong clues on the chance of a near-term rate hike.

"The governor stressed risks surrounding the U.S. economy and re-confirmed the view the BOJ won't hike rates when markets are unstable. That may have led to receding market expectations of a year-end rate hike," said Atsushi Takeda, chief economist at Itochu Research Institute.

"But such risks may clear up. I believe there's still a chance the BOJ could hike rates in December," he said.

The BOJ ended negative interest rates in March and hiked short-term rates to 0.25% in July, in a landmark shift away from a decade-long stimulus programme aimed at firing up inflation and economic growth.

U.S. SLOWDOWN LOOMS

A majority of economists polled by Reuters earlier this month expected the BOJ to raise rates again this year, with most betting on a December hike.

The BOJ maintained its view the economy was on track for a recovery. It also upgraded its view on consumption to say it was on a "moderate increasing trend," compared with the assessment in July that it was "resilient."

Ueda said the BOJ was ready to raise rates if its economic and price forecasts are achieved, as Japan's real borrowing costs remained extremely low.

But he said the central bank's rate hike time will depend partly on whether the U.S. economy will achieve a soft landing, or suffer a bigger-than-expected downturn.

"Looking at consumption and other data, Japan's economy is on track and moving in line with our forecasts," he said. "But uncertainty on the U.S. economic outlook has heightened. That is offsetting some of our optimism on inflation expectations."

The remarks underscore how a recent slew of weak U.S. data, which led the

U.S. Federal Reserve

's decision on Wednesday to deliver an oversized reduction in borrowing costs, were casting a cloud over the BOJ's rate-hike path.

Ueda gave few clues on how much the BOJ could eventually raise rates, saying it was hard to pin down Japan's neutral rate, or the level that neither cools nor overheats growth.

Japan's economy expanded an annualised 2.9% in April-June and real wages rose for two straight months in July, easing fears that rising living costs will dent consumption.

But soft demand in China, slowing U.S. growth and the yen's recent rebound cloud the outlook for the export-reliant country.

Market volatility remains a key concern for BOJ policymakers after the July rate hike and hawkish remarks from Ueda triggered a spike in the yen and sharp falls in equity prices.

(Reporting by Leika Kihara; additional reporting by Satoshi Sugiyama, Makiko Yamazaki and Kantaro Komiya; Editing by Sam Holmes and Kim Coghill)