BOJ can't raise rates too slowly-Board member Suda

TSU, Japan, Sept 27 (Reuters) Bank of Japan (BOJ) Policy Board member Miyako Suda said on Thursday that the central bank needs to raise interest rates gradually and reasonably early before current low rates spur economic overheating.

Suda, seen as a policy hawk, also said that although problems in the U.S. housing market were likely to last longer than previously thought, a possible U.S. slowdown is unlikely to hurt Japanese exports -- a main engine of Japan's economic growth.

''In order to avoid being behind the curve, it is desirable to act reasonably early and gradually by looking at economic conditions ahead,'' Suda said in a speech to business leaders in Tsu, Western Japan.

The yen did not react much but Japanese government bonds extended losses partly on her comments, pushing the 10-year yield to a six-week high.

Analysts said that given her hawkish bent, however, her remarks were not much of a surprise.

''By underlying the need to raise rates, she gave a warning to market players, many of who expect no rate hike this year,'' said Susumu Kato, chief economist at Calyon.

Suda acknowledged that financial markets may remain shaky for now and the BOJ cannot slacken vigilance just yet, adding that the central bank needs to watch how recent market turmoil will affect Japanese business and consumer sentiment.

But Suda also said that the BOJ needed to watch not just downside risks but upside risks too.

''We have to bear in mind the risk that, if employment conditions continue to tighten and raw material prices remain high, inflation could swing higher unexpectedly in the not very distant future,'' Suda said.

Tomoko Fujii, senior economist and strategist at Bank of America said: ''For the time being, she would like to stay on hold but she should like to maintain expectations for a rate hike.

These comments mean we may not have to give up expectations for a December rate hike.

Swap contracts on the overnight call rate are pricing in about 50-55 percent chance of a rate hike by December.

BOARD SPLIT BOJ Governor Toshihiko Fukui said last week that all board members agreed that the Japanese economy was likely to keep growing in line with the bank's forecast.

Still, many analysts doubt Suda's optimism is shared by the dovish camp on the BOJ's nine-member board.

''Suda ... is a well-know hawk on the board and her view doesn't necessarily represent a consensus of the board members,'' said Hiroshi Shiraishi, an economist at Lehman Brothers.

In fact, the minutes of the bank's policy meeting on Aug. 22-23 published earlier this week showed a gap between doves and hawks.

The minutes showed while some board members argued the bank should raise rates as soon as it becomes confident about the economy and financial markets, a few other members struck a more cautious tone, stressing the need to make sure credit and housing woes will not upset the BOJ's scenario.

Recent Japanese economic news has not been completely encouraging for the BOJ.

Japan's economy contracted in the last quarter while Japan's core consumer price index is falling again on an annual basis.

The BOJ's tankan corporate survey on Oct. 1 is also expected to show a slight deterioration in business sentiment among Japanese big manufacturers.

The BOJ has said it will gradually raise Japan's ultra-low interest rates as it thinks they are disproportionately low.

REUTERS PBB PM1202