Nov. 22 (Bloomberg) -- Bank of Japan board member Seiji Nakamura said ``downside risks'' to U.S. economic growth are rising as the housing recession worsens.

``Housing investment continues to decline and consumer sentiment-related indicators are worsening because of the subprime-mortgage problem,'' Nakamura, 65, said today at a business meeting in Hiroshima, western Japan.

A slowdown in the U.S., Japan's biggest export market, will make it more difficult for the Bank of Japan to raise interest rates, the lowest among major economies. Mizuho Securities Co. today pushed back its forecast for the next rate increase by a year to January 2009 at the earliest.

Nakamura's comments ``suggest there will probably be no rate increase for some time,'' said Yasunari Ueno, chief market economist at Mizuho in Tokyo. Threats to growth both in the U.S. and Japan ``will probably increase,'' Ueno said.

Ueno follows economists at Lehman Brothers Holdings Inc., Goldman Sachs Group Inc. and UBS AG, who this month changed their projections for the next move from the first quarter of 2008 to the third.

Slower U.S. growth poses ``downside risks to the global economy, and it may affect Japan somewhat,'' Nakamura said in today's speech, his first since joining the board in April. He said he's watching the effect of the U.S. subprime-loan crisis on Japan and elsewhere.

Bond Yields

Bonds rose, pushing the 10-year yield below 1.4 percent for the first time in two years, as the world slump in corporate debt and equity markets prompted investors to buy government securities.

A recovery from the turmoil sparked by rising defaults on home loans to Americans with poor credit histories ``will probably take longer than we thought,'' Nakamura told reporters. ``The subprime problem appears to be spreading a bit.''

The central bank's Deputy Governor Toshiro Muto said in a Nov. 15 interview that deciding interest rates is becoming ``difficult'' amid rising uncertainty over the global economy.

World stock markets have lost $2.9 trillion since Oct. 31. The yen has gained more than 6 percent against the dollar this month and oil is approaching $100 a barrel.

Nakamura said he's concerned that rising oil costs and the yen's appreciation may affect exporters' earnings.

The yen traded at 108.78 per dollar at 4:19 p.m. in Tokyo from 108.42 late yesterday in New York. It rose to a two-year high of 108.26 yesterday. The yield on Japan's 10-year bond fell half a basis point to 1.415 percent after earlier declining to 1.395 percent, the lowest since September 2005.

Gradual Rate Increases

The Bank of Japan last week held the benchmark overnight lending rate at 0.5 percent. Nakamura reiterated the bank's policy of gradually raising rates based on developments in the economy and prices.

Expectations that borrowing costs will be kept low may encourage companies to overinvest, hampering the sustainability of growth, Nakamura said, echoing recent comments by Governor Toshihiko Fukui as well as Muto.

Japan's economy expanded an annualized 2.6 percent last quarter after contracting 1.6 percent in the previous three months, as exports and consumer spending countered a drop in housing investment, the government said last week.

Nakamura said he's closely watching developments in construction investment, after a rule change caused housing starts to tumble to a four-decade low in September. The government introduced the stricter building-permit regulations in response to a 2005 scandal involving faked earthquake-engineering data.

The housing market should eventually recover, he said.

Nakamura headed MOL Ferry Co., a subsidiary of Mitsui O.S.K. Lines Ltd., before joining the policy board.

To contact the reporter on this story: Keiko Ujikane in Tokyo at kujikane@bloomberg.net

Last Updated: November 22, 2007 02:23 EST