Sept. 13 (Bloomberg) -- Bank of Japan board member Atsushi Mizuno said policy makers remain committed to gradually raising interest rates even after recent signs of slower economic growth and lower-than-expected inflation.

``Things are in line with our scenario'' that prices are rising and the economy is expanding, Mizuno said in an interview in Tokyo yesterday. ``I want to emphasize that that means fine adjustments will continue to be made to interest rates.''

Mizuno's comments leave open the possibility the bank may raise its benchmark rate before the end of the year, as predicted by six of 15 economists surveyed by Bloomberg News at the start of this month. Policy makers in July raised the overnight loan rate for the first time in almost six years to 0.25 percent, the lowest among Group of Seven industrialized nations.

Japanese bond yields fell to a six-month low on Sept. 1, after consumer prices rose less than economists expected and factory output slowed, prompting speculation that the central bank would leave rates unchanged this year.

``We have been seeing some mixed reports recently with both strong and weak sides,'' said Mizuno, 47, who joined the central bank's policy board in December 2004. ``We don't necessarily interpret data the same way the market does.''

Consumer prices grew 0.2 percent in July from a year earlier, less than half the pace forecast by economists, after the government reshuffled the items it uses to measure inflation. Industrial production unexpectedly fell in July, the trade ministry said on Aug. 31.

Capital Spending

Those reports helped push yields on Japan's benchmark 10- year bonds to a six-month low of 1.6 percent on Sept. 1.

Since then, a report showed Japanese companies increased investment at the fastest pace in almost five years in the second quarter, while another said machinery orders, which reflect capital spending plans, had the biggest drop in almost 20 years in July.

The yield on Japan's 10-year government bond fell 3.5 basis points to 1.67 percent at 6:05 p.m. in Tokyo. The yen rose to 117.60 per dollar from 117.96 late in New York yesterday.

Bank of Japan board members have no predetermined view of monetary policy and will adjust rates based on developments in the economy and prices, minutes of the policy board's August 10- 11 meeting released today show.

``Members said that the bank would conduct monetary policy by carefully assessing economic activity and prices,'' according to the minutes.

Tankan Survey

``A significant increase in capital spending plans in the Tankan report or an acceleration in consumer prices could prompt the bank to raise rates again this year,'' said Takuji Aida, chief economist for Japan at Barclays Capital in Tokyo. Aida added that he doesn't expect a rate increase as the bank may want to gather more evidence about the impact a slowdown in the U.S. will have on Japan's economy.

Mizuno said the Bank of Japan's board will examine the result of its Tankan survey of business activity for signs about the strength of companies' investment plans. The Tankan is scheduled to be published on Oct. 2.

``We haven't seen signs that the rising momentum of capital spending is easing,'' Mizuno said. ``If the next Bank of Japan Tankan survey were to show that capital spending plans are being revised up further, and we determine that the increasing trend of capital spending is likely to stay intact,'' policy makers will need to judge whether the economy is growing faster than the bank projected.

`Unprejudiced'

The central bank raised interest rates on July 14, less than two weeks after its June Tankan report showed Japan's largest companies planned to increase investment at the fastest pace in 16 years.

The bank will release its semi-annual forecasts for prices and the economy on Oct. 31. In April, board members projected the economy would expand 2.4 percent in the year ending March 31 and prices would rise 0.6 percent. The inflation forecasts were made under the old method of calculating consumer prices.

``We plan to conduct policy in an appropriate and unprejudiced way by carefully examining economic data,'' Mizuno said.

Mizuno reiterated Bank of Japan Governor Toshihiko Fukui's stance that the revision to the consumer price index doesn't alter the bank's view that prices are rising.

Price Assessment Unchanged

The lower-than-expected increase in core consumer prices, which exclude fresh food, was mainly because of a reshuffle to the basket of goods the government uses to measure price changes. July core prices would have risen 0.6 percent under the old calculation. Mizuno said inflation was lower than economists expected because the government changed the way mobile-phone rates were calculated.

``We don't think there's any reason for us to alter our basic assessment on prices given the recent revision,'' Mizuno said. ``There is no change in the trend that the year-on-year change in the consumer price index will increase gradually.''

Mizuno said the decline in bond yields partly reflected a drop in yields in the U.S. and Europe. Yields on U.S. Treasury 10- year notes and German bunds dropped to five-month lows on Sept. 1. on concern growth in the world's largest economies is slowing.

``Financial-market participants seem to have started mentioning the effects of declining long-term interest rates in the U.S. and Europe as well as the difficulty the BOJ will likely have in raising interest rates further because of the change in the CPI standards,'' Mizuno said. ``We will need to continue to watch further moves in long-term yields closely.''

Economic growth in the U.S., the destination of more than a fifth of Japanese exports, slowed in the second quarter to an annualized 2.9 percent after higher oil prices caused consumers to rein in spending. The Federal Reserve ended two years of interest rate increases in August, when it kept its benchmark rate at 5.25 percent.

To contact the reporter on this story: Lily Nonomiya in Tokyo at lnonomiya@bloomberg.net

Last Updated: September 13, 2006 06:41 EDT