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TOKYO (Thomson Financial) - Bank of Japan (BoJ) governor Toshihiko Fukui said Thursday that the central bank has been closely monitoring the global financial markets to see if the recent turmoil will have any lasting impact on the nascent economic recovery of the world's second largest economy.

In his post-policy board meeting press conference, he gave no fresh hints on when the central bank might adjust its rates, while making it clear that the recent market volatility was a major factor in today's decision to keep rates on hold.

"Economic data that has been released since the last policy board meeting confirms the steady expansion of the Japanese economy, but because global financial markets have turned highly volatile, we found it is necessary to gather more information on developments in the financial and credit markets," Fukui said.

Earlier the BoJ's nine member policy board voted by eight to one to keep the overnight call rate target unchanged at 0.50 percent, the seventh straight meeting it has left the rate intact.

With markets battered by the US subprime mortgage loan troubles, which also sparked fears of a credit crunch, many central banks around the world came to the rescue over the past week pumping hefty amounts of liquidity into their respective banking systems.

Those moves, along with the US Federal Reserve's unexpected decision last Friday to cut its discount rate for loans to banks, helped quell some of the credit fears.

"I understand that global credit markets are now in the process of repricing risk, and we need to see if the current repricing proceeds in an orderly fashion, or if it develops in a disorderly manner," Fukui said.

In particular the BoJ wants to closely monitor how risk re-pricing affects the US economy, one of Japan's major trading partners.

"The process of that risk re-assessment which has been necessary will take some time before being completed and it will be painful," Fukui said.

"And during this painful process, (further) liquidity problems could emerge," he said, which central banks will have to address through additional fund injections.

And while the BoJ kept rates unchanged again today, Fukui warned that leaving interest rates too low for too long runs the risk of distorting financial market development.

He said the bank remains committed to adjusting rates in accordance with improvements in the economy and prices.

(1 US dollar=115.80 yen)

yasuhiko.seki@thomson.com

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