TOKYO, Nov 2 : Japan has made gradual progress towards anchoring inflation around the central bank's 2 per cent target, the Bank of Japan said in a report on Monday, bolstering the case for raising interest rates.

In reaching its decision, the BOJ weighed up inflation expectations, firms' wage- and price-setting behaviour, and the degree to which households and firms act based on the assumption that prices will rise by around 2 per cent, the central bank said.

"With underlying inflation moving around 2 per cent and upside risks to prices warranting attention, interest rate hikes will likely alleviate price pressures and underpin consumption," the bank said in the full version of its quarterly outlook.

Firms' inflation outlook appears to gradually converge around 2 per cent, while households' inflation expectations vary widely, it added.

"In recent years, the share of wage increases at levels broadly consistent with 2 per cent increase plus labor productivity growth has risen," the bank added.

"As such, underlying inflation has risen toward a level around 2 per cent over the past few years, and there has been gradual progress toward anchoring it at that level." Domestic consumption has recently been sluggish in real terms, the bank added, due to bad weather during the summer and a hit to spending from rising living costs.

"But consumption as a whole is likely to remain resilient" partly thanks to government subsidies to curb fuel prices, higher stock prices and rising wages from a tight job market, it said.

The BOJ publishes the full version of its quarterly report on the market day after it concludes its policy meeting, at which it releases a summary.