By Leika Kihara
TOKYO (Reuters) - Bank of Japan policymakers expressed confidence their aggressive monetary stimulus was working and urged the government to promote fiscal reforms to keep unwelcome bond yield rises in check, minutes of the central bank's August rate review showed.
Prime Minister Shinzo Abe is expected to decide in early October whether to proceed with a planned two-stage hike in the sales tax from next year, seen as a key first step to rein in Japan's ballooning public debt.
The Asahi newspaper said, without citing sources, that Abe has decided the economic recovery is robust enough to withstand the tax increase, pointing to the strong upward revision in second-quarter GDP on Monday.
Critics of the plan have argued that raising the tax now could delay an end to chronic deflation, although Japanese media reported on Tuesday the premier has decided that recent data has shown the economy is strong enough to withstand the tax hike.
At the August 7-8 rate review, the BOJ policymakers said the world's third-largest economy was starting to recover with initial signs that wages and household incomes were improving, boding well for personal consumption, according to minutes of the meeting released on Tuesday.
The central bank's massive government bond purchases are restraining long-term interest rates even amid such positive signs in the economy, many of the BOJ's nine board members were recorded as saying.
"Many members said it was important to maintain credibility of fiscal management to keep interest rates stable. They expressed hope that the government steadily promote steps to achieve fiscal consolidation," according to the minutes.
One of the nine board members warned that while the bond market remained stable now, there was potential instability that could take effect if there were unrealistic expectations the central bank's massive bond purchases could keep yield rises in check.
"One member said if the government's efforts towards restoring fiscal health weaken ... long-term interest rates may rise on eroding market confidence in Japanese government bonds and hurt the effect of the central bank's policies," the minutes said.
The BOJ injected an intense burst of stimulus in April, pledging to double the supply of money to meet its 2 percent inflation goal in roughly two years via massive asset purchases. It has stood pat on policy from that date.
But since then, central bank has urged the government to take steps to restore Japan's fiscal health, and BOJ Governor Haruhiko Kuroda has repeatedly called for the sales tax hike to proceed.
At the August meeting, the BOJ kept monetary policy steady and held off on revising up its assessment of the economy, preferring to wait for more clues on whether increasingly positive data would encourage companies to ramp up spending.
The central bank revised up the assessment at a subsequent meeting in September to say the economy is recovering moderately, reflecting brighter signs in capital spending.
(Editing by Edmund Klamann and Eric Meijer)