By Leika Kihara and Minami Funakoshi
TOKYO (Reuters) - Bank of Japan Governor Haruhiko Kuroda said an uptick in inflation toward 1 percent won't immediately trigger an interest rate hike, signaling that Japan will stick to its ultra-easy policy even as other major economies eye withdrawing stimulus.
Kuroda, who heads to Germany for a Group of 20 finance leaders' meeting this weekend, also echoed calls from European policymakers to protect free trade in an apparent push-back to the protectionist streak of U.S. President Donald Trump.
"Not only the G20 but the IMF and OECD have said protectionism damages global trade and global economic growth, and that it is necessary to maintain free trade and investment," Kuroda told a news conference on Thursday.
"Japan's stance on this will not change."
As widely expected, the BOJ maintained its pledge to cap long-term interest rates around zero at a policy meeting earlier in the day.
The move was in stark contrast to the U.S. Federal Reserve's decision hours earlier to hike interest rates for the second time in three months in an effort to return policy to a more normal footing.
But Kuroda made clear the BOJ would not follow the Fed's footsteps any time soon, saying that Japan still needed massive monetary support with inflation distant from the bank's 2 percent target and risks to growth skewed to the downside.
He shrugged off market speculation the BOJ may raise its target on bond yields later this year, when consumer inflation is expected to approach 1 percent due mostly to a rebound in fuel costs and rising import prices from a weak yen.
"Some market participants believe core consumer inflation will approach 1 percent in the latter half of this year. That might very well happen. But we won't automatically raise our yield target just because this happens," Kuroda said.
Instead of looking at a single price data point, the BOJ will take into account various factors like the health of the economy and long-term inflation expectations, he said.
"The momentum for inflation to accelerate to 2 percent remains in place but lacks strength," Kuroda said. "The BOJ will continue to promote powerful monetary easing ... to achieve its price target at the earliest date possible."
The BOJ on Thursday maintained its short-term interest rate target of minus 0.1 and a pledge to guide the 10-year government bond yield at around zero percent.
It also kept intact a loose pledge to maintain the pace of its annual increase in Japanese government bond (JGBs) holdings, which is 80 trillion yen ($706 billion).
PROTECTIONISM A RISK
Japan's long-stagnant economy has shown signs of life in recent months, with exports and factory output benefiting from a recovery in global demand.
Core consumer prices rose for the first time in over a year in January and analysts expect them to continue to pick up slowly but steadily.
That has led to a dramatic shift in market expectations, with a majority of analysts polled by Reuters predicting the BOJ's next move would be to start scaling back its ultra-easy policy.
Some analysts say the BOJ may be forced to raise its yield target to avoid ramping up bond purchases if Japanese long-term interest rates track global bond yield rises, which are being driven by expectations of higher U.S. interest rates.
Kuroda rebuffed such a view, saying that he does not see the need to raise the yield target just because the Fed is doing so.
His latest comments may scale back market expectations of a near-term rate hike and embolden analysts who doubt the economy will gather enough steam for inflation to rise sustainably.
"Very few people expect inflation to reach 2 percent. In addition, I see no change to inflation expectations," said Shuji Tonouchi, senior market economist at Mitsubishi UFJ Morgan Stanley Securities.
"In these circumstances, raising the 10-year yield target cannot be considered. Even if the BOJ wanted to move, I don't think it could."
A rising global tide of protectionism is adding to concerns for Japanese policymakers, given the economy's heavy reliance on exports and free trade.
Trump has accused Japan for using "money supply" to weaken the yen and give its exports an unfair trade advantage.
Kuroda stressed the BOJ's easing was aimed at beating deflation, and that interest rate differentials between Japan and the United States alone would not determine currency moves.
(Additional reporting by Stanley White and Kaori Kaneko; Editing by Kim Coghill)