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BOJ's Nakamura Warns of Risks to Global Economy

Bank of Japan policy board member Seiji Nakamura said on Thursday the global economic outlook is highly uncertain due to world inflation worries and slowing economic growth, signaling there will be no policy change by the central bank in the near term.

But Nakamura, who has voted with the majority for no rate hike since joining the bank's policy board in April last year, said solid growth in emerging nations will prevent the global economy from entering a serious adjustment.

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"When uncertainty is very high, it is inappropriate to have a preset idea on the direction" of the next policy move, Nakamura said in a speech to business leaders in Asahikawa, northern Japan, stating the official BOJ line on policy.

On Japanese prices, Nakamura said annual core consumer inflation could accelerate to around 1.5 percent in the near term, although he signaled that the central bank will not act on short-term price moves alone.

Financial markets did not react much to the remarks as they did little to alter the prevailing market view that the BOJ will keep rates on hold until early next year or later, even as global inflation worries prompt U.S. and European central banks to take a tightening bias.

"His stress was more on the downside risks, such as the U.S economy, and the impact of rising energy prices on emerging countries with low energy efficiency," said Yasunari Ueno, chief market economist at Mizuho Securities.

"He basically traced the Bank of Japan's semi-annual economic and price outlook report (released in April), indicating that an interest rate hike is unlikely for the time being."

Derivatives markets are now pricing in about a 35 percent chance of a 25 basis point hike in Japan's benchmark interest rate, now at 0.5 percent, by the end of this year.

Nakamura said the central bank needed to closely monitor how rising overseas inflation pressures could affect prices in Japan, where annual core consumer inflation hit a decade-high 1.2 percent in March.

The year-on-year rise in Japan's core consumer price index (CPI), which excludes fresh food but not energy prices, could accelerate to around 1.5 percent in the near term, Nakamura said, a view in line with those of many economists.

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But he said monetary policy should be implemented with a long-term perspective and should not react to short-term price moves caused by various external shocks.

Although the BOJ, like other central banks, is worried about inflation from soaring raw materials costs, it sees little need to shift to a tightening bias, as inflation is not spreading much beyond food and energy prices.

Economists polled by Reuters expect nationwide core CPI, due out on Friday, to show a rise of 1.4 percent in May from a year earlier, much lower than in many major economies. The euro zone's, by comparison, is a record 3.7 percent.

The BOJ had been working towards "normalizing" rates in Japan, its parlance for raising the country's very low rates to more normal levels, after nearly a decade of deflation.

But the credit squeeze and global economic slowdown triggered by defaults on risky U.S. mortgages forced the Japanese central bank to drop it bias towards raising rates.

Reflecting concerns about growth, the BOJ lowered its assessment on exports and corporate profits in its monthly report for June as rising energy and material costs hit company earnings.

Japan's economy grew 1 percent in January-March thanks to solid exports, but economists expect it to contract slightly in the April-June quarter as a likely slowing in exports and spikes in crude oil prices eat into corporate profits.

The BOJ has left monetary policy steady since February 2007, when it raised rates to 0.5 percent. It dropped its tightening bias in April to adopt a neutral stance due to uncertainties at home and abroad.