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BOJ won't hike rates when markets unstable, Uchida says

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Market volatility could 'obviously' affect BOJ rate

decisions

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Uchida's remarks boost Nikkei, send yen falling

(Adds analyst quotes, Uchida's comment in 10-11, 15-18th

paragraphs)

By Leika Kihara

HAKODATE, Japan, Aug 7 (Reuters) - The Bank of Japan's

influential deputy governor said on Wednesday the central bank

won't hike interest rates when markets are unstable, playing

down the chance of a near-term hike in borrowing costs.

The remarks by Shinichi Uchida, which contrasted with

Governor Kazuo Ueda's hawkish comments made last week when the

BOJ unexpectedly raised interest rates, boosted Japan's Nikkei

share average and sent the yen sharply lower.

Uchida said the intense market volatility in the past week

could "obviously" change the BOJ's rate hike path if it affects

the central bank's economic and price projections and the

likelihood of Japan durably achieving its 2% inflation target.

"As we're seeing sharp volatility in domestic and overseas

financial markets, it's necessary to maintain current levels of

monetary easing for the time being," Uchida said in a speech to

business leaders in the northern Japanese city of Hakodate.

The recent strengthening of the yen would affect the BOJ's

policy decision-making because it reduces upward pressure on

import prices, and therefore overall inflation, Uchida said.

Stock market volatility would also influence its decisions

by affecting corporate activity and consumption, he added.

"Unlike U.S. and European central banks, we're not in a

situation where we would end up being behind the curve unless we

hike interest rates at a set pace," Uchida said.

"We won't raise interest rates when financial markets are

unstable," Uchida said.

The dollar surged to a session high of 147.50 yen

and was last up 1.6% at 146.59 after Uchida's remarks. The

Nikkei average climbed 3%, while the benchmark 10-year

Japanese government bond (JGB) yield fell 1 basis

point to 0.875%.

"The BOJ hiked interest rates because it didn't like the

weak yen. Now, it appears to be suggesting a pause in rate hikes

because it doesn't like stocks falling," said Takuya Kanda, an

analyst at Gaitame.com Research Institute.

"If the BOJ is watching markets so much in setting

policy, there's a chance it won't be able to raise rates that

much."

U.S. OUTLOOK KEY

Last week, the BOJ raised interest rates to levels unseen in

15 years and unveiled a detailed plan to slow its massive bond

buying, taking another step towards phasing out a decade of huge

stimulus.

Governor Ueda said the BOJ will keep raising rates if the

economy and prices move in line with its projection, signalling

the chance of steady hikes in coming years.

The hawkish remarks, as well as weak U.S. labour data that

stoked fears of recession in the world's largest economy, helped

contribute to a global market rout that sent the yen soaring and

Japan's Nikkei average plunging on Monday.

Markets have whipsawed since then, partly as traders

reassessed the timing and pace of future BOJ rate hikes.

While stressing the need to keep monetary policy loose

for the time being, Uchida said Japan's economy was likely to

keep recovering with the United States seen achieving a soft

landing.

"Uchida's comments are clearly dovish. Unless market

sentiment recovers rapidly, the chance of the BOJ hiking rates

either in September or October is low," said Toru Suehiro, an

economist at Daiwa Securities.

"But if U.S. recession fears subside around year-end,

the BOJ will likely raise rates in December," he said.