HIGHLIGHTS-BOJ board member Mizuno's comments in Aomori

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AOMORI, Japan, July 24 (Reuters) - The fog hanging over Japan's economy is unlikely to clear any time soon, Bank of Japan Policy Board member Atsushi Mizuno, seen as one of the board's most hawkish members, said on Thursday.

Rises in energy and raw material prices have had a far larger impact both on the economy and prices than the BOJ had expected when it drew up half-yearly economic forecasts in April, Mizuno said in a speech to business leaders in Aomori, northern Japan.

He also said in a news conference that he was more concerned about downside risks to the economy than about inflation.

Following are key comments from the speech and at a news conference:

MONETARY POLICY

"My personal view is that downside risks to domestic demand are heightening due to a rise in energy and raw material prices. Prices are rising but we are not in a situation where wages also rise, leading to stagflation. I think it is appropriate to have more awareness of downside risks when conducting monetary policy."

"I just can't say now under what conditions we will be able to raise rates. The fog hanging over the Japanese economy may thicken. The U.S. economic slowdown may go deeper. Oil prices seem to be stabilising for now, but it's just too early to say whether they are peaking out. We just have too few data" to talk about the conditions for a rate hike.

"The BOJ has kept interest rates unchanged since March last year, but there is no change in our view that monetary conditions remain accommodative."

"In a statement on monetary policy issued on July 15, we said, 'If the downside risks to the economy happen to decrease, this will increase the risk of possible swings in economic activity and prices due to a prolonged period of accommodative financial conditions.'"

"I hope you understand that means we are discussing appropriate monetary policy at each board meeting, while always keeping in mind the side effects of continually leaving the rate at 0.5 percent, taking into account Japan's potential growth rate."

JAPAN'S ECONOMY

"Industrial production may be flat or fall slightly in April-June and July-September after the fall in January-March.

"Considering that, there is a chance the government will say in future that Japan has entered a recession. But at the same time, I'd like to also stress that it is unlikely that Japan will go through a deep recession because companies have worked through their triple excesses (in facilities, inventory and employment from Japan's asset bubble era in the early 1990s)."

"I think there is a possibility that it will take more time than the BOJ officially says before the Japanese economy recovers."

"I'm not confident about whether Japan's growth in 2009/10 will be higher than 2008/09. The U.S. economic outlook, East Asian economic conditions and financial market problems are all becoming more complicated than markets, as well as the BOJ, had expected a year ago, or half a year ago. We cannot be optimistic about the outlook for oil prices either."

"The BOJ has pointed to the fog hanging over the nation's economy, namely the turmoil in U.S. and European credit and stock markets stemming from subprime loans problems, as well as the downward pressure on domestic private demand from rises in energy and raw material prices."

"In addition, I personally think there is a new fog of heightening inflationary pressure in emerging economies in East Asia."

"The fog hanging over our economy is unlikely to be cleared for a while."

"The BOJ slightly downgraded its view on the economy in its July economic report saying that the Japanese economy is further slowing due to the effects from high energy and raw materials prices..."

"In short, energy and raw materials costs have pushed up core CPI and have hurt corporate profits and personal consumption in much severer ways than we had forecast in the April outlook report."

"Exports are still on an upward trend but are slowing at the moment because of a decline in auto shipments to the United States and signs of an economic slowdown in East Asia."

"Looking ahead, exports are likely to continue their upward trend even though the global economy is slowing to some degree as an increase in exports to Russia and the Middle East is likely to offset falls in exports to the United States."

"It is clear that Japan's economy is slowing... Looking at the coincident indicator index, the government is more likely than before to downgrade its assessment to 'worsening' from 'the possibility of a change in the economic trend' in the near future."

"The government may judge that the economy has entered a gradual downtrend after hitting a peak in October-December last year."

RISKS

"Financial markets are focusing on movements in international financial and capital markets and the outlook for the U.S. economy, but I am personally worried about the outlook for economic activity and prices in emerging countries."

"If emerging economies, East Asia in particular, falter, it would be necessary to revise down Japan's growth forecasts."

JAPAN PRICES

"It is a matter of time before domestic corporate goods prices rise 6 percent or more from a year earlier, given the rise in raw material prices such as iron ore and chemical products and given expectations for some automakers to hike prices of trucks and buses."

"As domestic final consumer goods prices -- which are seen as a leading gauge for consumer prices -- jumped 3.2 percent, the core CPI excluding fresh food is likely to rise 1.8-1.9 percent in June from a year earlier following a 1.5 percent rise in May.

"As price hikes spread among retailers, I expect core CPI to rise 2.5 percent by autumn."

"We are concerned about downside risks to personal consumption due to rising prices. In fact, indicators related to personal consumption were notably weak in April and May, except for sales of household appliances."

"Weakness in sales for the restaurant sector and for department stores point to increasing wariness from households over price hikes."

WORLD ECONOMY, INFLATION

"In the United States, weakness in the labour market and stagnation in personal consumption have become clearer ... It may take up to 2010 for the U.S. economy to return to its potential growth rate of around 2.5 to 2.75 percent."

"Inflation rates around the world are rising on soaring raw material, energy and commodity prices."

"Personally, I think (the surge in raw material prices) is mainly due to 'demand-side' factors, or the strength in emerging economies ... It is difficult to explain soaring raw material and commodity prices as a 'bubble' or as something driven simply by speculative (trade)."

"Personally, I think that stabilising crude oil prices is indispensable in stabilising the global economy. To stabilise crude oil prices, multiple measures need to be taken ... That is to say, there are limits to trying to curb global inflationary pressure just through monetary policy."

"Emerging markets face a dilemma of rising inflationary pressure and worries over an economic slowdown. Stock prices and currency rates (in the region) have been unstable as uncertainty increases over the outlook for monetary policy and long-term interest rates."

"We need to be particularly aware of rising inflationary pressure in East Asian economies, as it could turn into a new fog (of uncertainty) for Japan's economy." (Reporting by Hideyuki Sano and Tokyo Policy Desk; Editing by Edwina Gibbs and Hugh Lawson)