Bank of Japan Governor Kazuo Ueda hinted at a potential interest rate hike in July as Japan's annual inflation rate climbed to 2.8% in May, surpassing the BOJ's 2% target for over two years.

The central bank is considering the impact of recent cost increases on consumer prices, which have been stable at 2-2.5%.

Core consumer prices rose 2.5% from a year earlier, with energy prices up by 7.2% and food prices by 3.2%. Service prices rose by 1.6%.

Japanese markets saw gains as the Bank of Japan discussed the potential for an early rate hike due to increasing upside risks to prices. The Nikkei average rose 0.54% and the Topix index settled 0.57% higher.

Export-related companies benefited from a weaker yen, with automakers like Mazda, Honda, and Toyota seeing impressive gains. Authorities are prepared to intervene in the currency market if necessary to support the yen.

Despite concerns about weak consumption and a first-quarter economic contraction, Governor Ueda aims to address the risk of inflation exceeding expectations and maintain economic stability, potentially leading to a rate increase to 0.25% this year.

The central bank is cautious about the effects of wage increases on consumer prices and the weak consumption. The yen's depreciation and the impact on economic activity are additional concerns.

Japan has been put back on the US's currency manipulator watch list.

The bank will continue its current monetary easing to assess the effects of export suspensions by Japanese automakers.

Investors are closely monitoring inflation trends to guide future monetary policy decisions in Japan.