BOJ chief's remarks seen as signalling rate hike this month

By Leika Kihara

TOKYO, June 3 (Reuters) - Bank of Japan Governor Kazuo Ueda said the central bank must discuss the pros and cons of raising interest rates if inflationary risks outweigh downside risks to the economy, in comments that signal a higher chance of a rate hike this month.

"Japan is currently in a situation in which the secondary spillover effects of inflation stemming from higher crude oil prices are more likely to lead to an overshoot of underlying inflation," Ueda said in a speech on Wednesday.

"We believe it's necessary to make decisions on future policy based on this premise."

The dollar fell 0.3% against the yen to 159.40 after Ueda's remarks, which heighten the chance for the BOJ to raise its policy rate to 1% from 0.75% at its next meeting on June 15 and 16, as many market players predicted.

Ueda warned that price pressures from the Iran war-induced energy shock might not prove temporary and could push up underlying inflation more than the BOJ projects.

If the central bank delays action necessary to combat inflation, it could be forced to hike rates substantially later and inflict a heavy burden on the economy, markets and the financial system, Ueda said.

"While the BOJ should be attentive to downside risks to economic activity, it should be more vigilant to the chance of inflationary risks materialising and exerting an adverse impact on the economy," he said. (Reporting by Leika Kihara; Editing by Clarence Fernandez)