HIGHLIGHTS-Bank of Japan policy board March 6-7 minutes

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TOKYO, April 14 (Reuters) - The Bank of Japan policy board agreed that downside risks to the U.S. and global economy were heightening while financial market adjustments were being prolonged and were deepening, minutes of the central bank's March 6-7 policy review showed on Monday.

One board member said the central bank would need to examine whether Japan's favourable economic cycle would continue, given that caution was growing in domestic corporate activity.

At the meeting, the last chaired by former BOJ Governor Toshihiko Fukui before he retired, the board voted unanimously to keep the key rate target unchanged at 0.5 percent in the face of the fallout from the U.S. subprime mortgage mess.

The central bank also kept interest rates on hold at the following meeting on April 8-9, which was chaired by Masaaki Shirakawa who has become new governor of the central bank three weeks after Fukui retired last month.

Following are some key points from the minutes of the meeting:

MONETARY POLICY

-- The board members agreed that it was important to set monetary policy while assessing the outlook of the economy and prices and both upside and downside risk.

-- One member said the bank should closely examine the sustainability of the favourable of cycle of growth in production, income and spending, given that firms had recently become noticeably cautious.

-- Another member said the bank should flexibly take appropriate action if the situation called for an easing, even though the current direction of adjustment in the policy interest rate was considered to be appropriate.

U.S., GLOBAL ECONOMY

-- Board members shared the view that although global economies were expanding, albeit at a slower pace, downside risks, particularly to the U.S. economy, had increased with global financial markets continuing to be unstable.

-- Members agreed that adjustments in global markets had persisted and intensified due to uncertainties over the global economy, market concerns about further losses at financial institutions and the creditworthiness of U.S. monoline insurers.

-- Members concurred that a slowdown in the U.S. economy had become more evident. They shared the view that downside risks to the U.S. economy were growing.

-- One member said deterioration in the U.S. economy would have a negative impact on the global economy. But it could happen with a significant time lag and may not have a great effect, with emerging economies continuing a high domestic-demand-led growth.

-- A few members said the global economy was facing upside risks on prices, given surging and crude oil and other commodity prices on robust demand from emerging economies and a speculative inflow of funds to commodity markets.

DOMESTIC ECONOMY, PRICES

-- One member said that the annual core consumer price index was likely to continue to rise for the time being.

-- Another member said the effect from the yen's rise on domestic prices would be limited, although it would put downward pressure on import prices, as many firms were unable to pass on rising costs in imported materials to sales prices.

-- Members concurred that the financial environment remained accommodative.

-- A few members said the effects of global financial market disruption on domestic financial conditions remained limited.

-- But those members said attention should be paid to slight deterioration in credit conditions at small firms and lending attitudes of financial institutions towards these firms and the issuing environment for corporate bonds with low credit ratings. (Reporting by Tetsushi Kajimoto)