Japanese service prices are rising and bumper pay hikes offered by firms will boost household income later this year, the Bank of Japan said, underscoring its conviction the economy is making progress towards sustainably achieving its 2% inflation target.

The outcome of this year's strong wage negotiations will boost salaries around summer and underpin consumption, the BOJ said in a full version of its quarterly outlook report, adding that household spending is expected to gradually increase.

"Companies' positive wage- and price-setting behaviour is broadening," with labour shortages pushing up wages and prodding more firms to pass on higher costs through hikes in service prices, the report said on Tuesday.

A composite index crafted by the BOJ also showed Japan's long-term inflation expectations are heightening to around 1.5%, the report said, adding to growing signs of change in how households and companies see the price outlook.

The BOJ ended eight years of negative rates and other remnants of its unorthodox policy last month, making a historic shift away from decades of massive monetary stimulus that was aimed at quashing deflation and revitalising growth.

Markets are focusing on hints on how soon the central bank could hike rates again, with many analysts betting on action sometime later this year.

In a summary of the quarterly report released on Friday, the BOJ projected inflation to stay near its 2% target in the next three years.

BOJ Governor Kazuo Ueda has said sustained wage gains must translate into higher service prices for inflation to durably hit its 2% target, and meet the conditions for another rate hike.

The BOJ usually releases the full version of its quarterly outlook one market day after the summary.

(Reporting by Leika Kihara Editing by Shri Navaratnam )