Credit market turmoil could bring further pain: BoJ chief

TOKYO (AFP) - Recent credit market problems could require more time and "pain" to resolve as investors reprice risk, Bank of Japan governor Toshihiko Fukui warned Thursday.

The central bank will keep a close watch on financial market volatility as it decides when to next raise interest rates from 0.5 percent, Fukui said after the BoJ left its monetary policy unchanged for a sixth straight month.

"Even if the (credit market) correction progresses is an orderly manner it will most likely take some time, and the process could also bring losses and pain," he told reporters.

"The Japanese economy continues to expand gradually but there has been high volatility in global financial markets. We need to continue to monitor the situation," Fukui said.

Fears of a credit crunch spreading from problems in the US housing sector have gripped financial markets around the world, triggering a series of heavy sell-offs.

But Fukui said that Japanese banks did not appear to be significantly exposed to problems linked to delinquencies in US subprime mortgages to risky borrowers.

Japanese banks "did not take that much risk," he said.

The BoJ's policy board earlier voted 8-1 to maintain the benchmark lending rate at 0.5 percent at the end of a two-day meeting.

Fukui said he did not have any preset schedule for the next rate hike.

He said if the central bank took a "forward-looking" approach to setting monetary policy the Japanese economy shoud enjoy a long expansion but keeping rates very low for too long could store up trouble for the future.

"Players would take skewed risks if they believe the BoJ will continue to keep interest rates at a level that is far from the economic reality," he said.

Until recently markets had been betting on an August rate hike but plunges in global share prices and a sharp appreciation of the yen prompted analysts to push back their forecasts for when Japanese interest rates will next go up.

Japan's stock market has been one of the hardest hit by the recent global rout, although it has recovered some of its losses this week, with the Nikkei-225 index closing up 2.6 percent Thursday.

The Bank of Japan, US Federal Reserve, European Central Bank and other central banks have pumped hundreds of billions of dollars into the financial system in the past two weeks to ward off a credit crunch.