Some Bank of Japan policy board members expressed concern in early July about the risks of U.S. subprime mortgage problems spilling over to global financial markets, minutes of the BOJ's July 11-12 meeting showed on Tuesday.
Many BOJ board members also said there was still uncertainty about adjustments in the U.S. housing market due to the subprime loan problems, the minutes showed.
"If such problems were to affect credit markets, although this was not likely to happen, the possibility could not be ruled out that the economic and financial situation worldwide, including in Japan, would be negatively affected," the minutes of the meeting showed.
Financial markets have subsequently gone through a shakeout, prompting the BOJ to keep rates unchanged at its board meeting last week. Financial markets had seen an August rate hike as almost a done deal prior to the market turmoil earlier this month.
The nine-member board agreed by 8-1 votes at the July and August meetings to keep the overnight call rate target at 0.5%.
"It was interesting to see that board members were already aware of the subprime loan problems in July, referring to the risks of them affecting credit markets," said Masaaki Kanno, chief economist at JPMorgan Securities Japan.
"We now expect the BOJ could raise rates in November at the earliest because it will take the bank another couple of months to see how the subprime loan problems may affect the real economy by examining coming economic data for September."
Board member Atsushi Mizuno voted against the decision at both meetings. In July, Mizuno said he saw the economy improving more than the central bank's forecast in its twice-yearly outlook report in April, adding that it remained less likely that the economy would undershoot the bank's forecast, the minutes showed.
"The bank should promptly decide on and implement policy changes when justified by economic conditions," the minutes added on Mizuno's views.
He proposed raising rates to a 12-year high of 0.75% from 0.5% at the July meeting, the minutes showed.
Mizuno also opposed the bank's view on recent economic and financial developments, saying the economy had deviated slightly upward from the BOJ's outlook report due to greater-than-expected strength in corporate, household sectors and overseas economies.
The BOJ ended its zero interest rate policy last year, raising rates to 0.25% in July 2006, its first rate hike in six years. The bank then raised the overnight call rate target to a decade-high 0.5% in February.