By Leika Kihara

KANAZAWA, Japan (Reuters) -The Bank of Japan must stay on course to raise interest rates further but tread carefully to ensure volatile markets do not badly hurt businesses, its board member Hajime Takata said on Thursday, signalling his caution over hiking rates too soon.

Takata said the central bank will raise interest rates in several stages if economic and price developments move in line with its forecast, echoing last month’s comments by governor Kazuo Ueda.

But he said any rate hikes will be conditional on volatile markets not discouraging companies from boosting spending and increasing wages.

“Obviously, our basic stance is to adjust the degree of monetary support if our economic and price forecasts are achieved,” Takata told a news conference, reiterating the BOJ’s long-term plan to raise interest rates.

“But that stance is not without qualification. If market developments emerge as a risk to the economy, we need to take that into account,” he said, stressing the need to scrutinise at each policy meeting how market moves were affecting corporate activity.

Takata said the BOJ had no preset idea in mind on how quickly and how much it would eventually raise rates, arguing that it must spend “plenty of time” to gauge economic and market developments.

“The stock and currency market saw big volatility in early August and the fallout continues. As such, we need to scrutinise market developments and their impact for the time being,” Takata said in a speech to business leaders in the city of Kanazawa.

INFLATION ALSO A RISK

Mounting unease over the U.S. economic outlook is stoking global markets volatility, with Japan’s broad Topix share gauge plunging 3.7% on Wednesday in its biggest daily drop since the Aug. 5 market rout.

The August market sell-off prompted deputy governor Shinichi Uchida to say the BOJ won’t hike rates when markets are unstable.

In a historic step towards ending a massive decade-long monetary easing campaign, the BOJ ditched negative interest rates in March and raised short-term rates to 0.25% in July on the view the economy was making progress toward durably achieving its 2% inflation target.

Governor Ueda has signalled the bank’s readiness to raise rates further if inflation stays around 2% in coming years accompanied by solid wage gains, as it currently projects.

The BOJ’s plan to keep raising rates comes at a time when many other central banks are beginning to ease policy after an aggressive tightening phase to deal with red-hot inflation.

The difference in monetary policy stance between that of the BOJ and other central banks could cause market turbulence, Takata said. “As such, we must carefully monitor domestic and overseas developments for the time being,” he said.

Takata also warned of the potential risk of an overshoot in inflation as companies become more keen than before about passing on rising costs through price hikes.

“We must scrutinise without any pre-set idea the chance of Japan seeing another wave of price hikes toward the latter half of the current fiscal year,” he said in the speech.

Data released on Thursday showed Japan’s inflation-adjusted wages rose for two consecutive months in July, underscoring the BOJ’s view that rising pay will support consumption and enable firms to keep hiking prices.

Takata offered few clues on how he saw the level of Japan’s neutral rate of interest – or the level that neither cools nor stimulates the economy. That rate is crucial to determining how far the BOJ could eventually raise rates.

“We shouldn’t raise our policy rate with a set neutral rate in mind,” as it was hard to pin down its exact level, he said.

A former bond strategist, Takata has voted for the BOJ’s policy shifts, and is considered by markets as neutral to slightly hawkish on monetary policy.

(Reporting by Leika Kihara; Editing by Himani Sarkar and Shri Navaratnam)

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