Nakaso, in a speech to business leaders in Hiroshima, western Japan, also expressed confidence that inflation will reach the BOJ's 2 percent price target around fiscal 2019 and said the BOJ should stick with its quantitative easing programme.

A pickup in consumer spending, rising exports and an improving output gap are all reasons to be positive about the outlook, but many economists still argue that the BOJ's inflation forecasts are overly optimistic.

Nakaso later said the central bank needs to continue buying exchange-traded funds (ETFs) to lower risk premiums, but the policy is coming under increasing criticism for artificially pushing up stock prices.

The BOJ last week kept monetary policy steady but once again pushed back the timing for achieving its elusive inflation target, reinforcing views it will lag well behind other major central banks in scaling back its massive stimulus programme.

"Companies are trying to absorb higher labour costs by revising their business processes," Nakaso said on Wednesday.

"The BOJ doesn't expect this to continue for ever. The output gap is clearly improving, so companies will become more aggressive in setting wages and prices."

Nakaso added that he saw no need to ease policy further because there is still upward momentum in consumer prices.

Nakaso gave a few examples of corporate streamlining: some companies in retail and dining have responded to a labour shortage by shortening their business hours instead of raising wages to attract workers.

Some companies are also investing in labour-saving technology, such as self-checkout tills, which allows companies to maintain their current level of service with less workers.

Such behaviour has allowed companies to avoid passing higher costs on to consumers, but there are signs that sentiment is turning, Nakaso said.

The BOJ's tankan survey for June shows shipping, wholesale, retail, and hospitality firms are considering raising prices in the future.

Business leaders from Hiroshima, which is home to automaker Mazda Motor Corp, expressed concerns about labour shortages and interest in capital expenditure to deal with this problem, according to Nakaso.

Despite the short-term negative impact on wages and prices, investment in labour-saving technology should be welcomed because it raises productivity in the long term, Nakaso said.

It also important to put structural policies in place to make the labour market more fluid, Nakaso said.

The BOJ has a negative 0.1 percent short-term interest rate and buys government debt to keep 10-year yields near zero.

The central bank also buys ETFs so its holdings increase at an annual pace of 6 trillion yen (£41.18 billion), and some analysts say this has exaggerated gains in the underlying share prices of many companies.

"I think ETF purchases are still necessary, but this is something that we debate and decide on at each policy meeting," Nakaso said.

"Right now I think the benefits outweigh the costs."

The BOJ has now postponed its inflation target timeframe six times since Governor Haruhiko Kuroda launched his huge asset-buying programme in 2013.

Japan's core consumer prices rose just 0.4 percent in May from a year earlier.

(Reporting by Stanley White; Editing by Kim Coghill)

By Stanley White