The Bank of Japan will hike short-term interest rates at a "slow" pace while cautiously watching economic and price situations, said Atsushi Mizuno, one of the nine BoJ policy board members. Mizuno told a business community in Fukuoka City in southern Japan that "we will adjust the level of interest rates 'slowly' by carefully monitoring economic and price developments." But he warned that it would be wrong to assume there is no more rate hike this year after the central bank ended its zero rate policy in July by raising the target for the overnight call rate to 0.25 pct from near zero, the first rate hike in six years. "What concerns me is that when the bank sends out the message of 'slow interest rate adjustment,' there is a risk that it could be misunderstood as 'no more rate hike this year' and cause long-term interest rates to fall despite improvement in economic fundamentals," Mizuno said. He said the central bank will steer monetary policy with a stance of "data dependence" by monitoring various indicators, not just the core consumer price index that he said many market participants are focused on. The core CPI, which excludes volatile fresh food prices but includes gasoline and heating oil costs, has shown inflation is tame, with the June national index up 0.6 pct from a year earlier. "Personally, I am interested in labor indicators, such as the jobs-to-applicants ratio, wages, nonfarm payrolls and full-time employment," Mizuno said. "For the purpose of measuring the sustainability of economic recovery, I am focused on the labor and income environment. In order to judge the price trend, I monitor changes in wages," he added. Mizuno, known for his hawkish policy stance, cautioned that too much stimulus would trigger a boom-and-bust cycle. "With real-term policy interest rates further into negative territory, if the stimulative effect of monetary policy works too much, medium- to long-term economic activity will become volatile, a risk that should be considered," he said. While the inflation rate is at 0.6 pct, overnight call rates are drifting around the 0.25 pct target, which means short-term funding costs minus inflation are now negative, compared with higher real borrowing costs under deflation. Mizuno stressed more upside risks to sustained growth under price stability than downside risks. "Possible inventory adjustment," which was listed as a downside risk factor in the BoJ's semi-annual outlook released in late April, "is likely to be modest even if it emerges in the latter half of the current fiscal year," he said. The balance between shipments and inventories is improving, although industrial production in the April-June quarter showed only low growth, he added. The trade ministry said Monday that the output index rose 0.8 pct in the second quarter from the previous three months to a record high of 104.8, marking the third consecutive quarterly rise. In addition, Mizuno said he thinks the possibility of "more active corporate investment," which was cited as an upside risk factor in the outlook, appears "more likely to be become reality." Mizuno concluded that risks are on the upside. "Should capital spending continue to rise, there would be a higher possibility of revising up our Outlook for the economic growth rate towards the 2007 fiscal year (to March 31, 2008)," he said. In its April outlook, the BoJ said: "The current recovery of the economy has already lasted for over four years and is likely to mature, (therefore) the growth rate is likely to slow gradually toward the potential growth rate." The BoJ's board projects that Japan's real-term gross domestic product will grow at 2.4 pct in the current fiscal year and 2.0 pct in fiscal 2007.