UPDATE 3-BOJ hawk says rate move needed when sure on economy

(For more stories on the Japanese economy click [ID:nECONJP]) (Adds comments from news conference)

By Yoko Nishikawa

KANAZAWA, Japan, Aug 28 (Reuters) - The Bank of Japan should not relax its guard on inflation risks and it should raise interest rates once it is convinced that economic woes have cleared, a hawkish member of the central bank's policy board said on Thursday.

Despite fears of a recession in the world's second-largest economy, a BOJ rate cut is seen as very unlikely because policy rates are already so low at 0.5 percent and money market futures are showing little chance of either a hike or cut.

Miyako Suda said that while she has no bias towards monetary policy now, any future decision to raise rates should be made early to avoid a situation where the central bank may end up having to do so rapidly.

"Once we can be sure that the economy will return to a sustainable growth path under price stability, I think we should take certain action," Suda told a news conference after meeting business executives in Kanazawa, central Japan.

"I am not saying we should do so when downside risks exist and downside risks need to be diminished before we take any action. I don't know when that will happen, but it is desirable that we take action when it becomes more likely that the economy will keep growing," she said.

Suda's comments briefly pushed the lead September Japanese government bond futures down to 138.16 from around 138.35 before the news conference. 2JGBv1

Suda also said in a speech delivered earlier to the business leaders that while the momentum for growth in Japan's economy has been weakening, she did not expect a sharp downturn as seen in 1998 or 2001.

"Suda's speech showed her characteristics as one of the most hawkish members of the BOJ board," said Takeshi Minami, chief economist at Norinchukin Research Institute.

"Given (BOJ Governor Masaaki) Shirakawa's remarks earlier this week, the BOJ appears to be reiterating that there is not much it can do at this point in terms of interest rate policy."

Japan's core annual consumer price inflation is expected to have hit a fresh decade-high of 2.3 percent in July, according to a Reuters poll, which would be a blow to consumers smarting from worsening job conditions and paltry pay rises.

The inflation data as well as government surveys on the jobless rate, industrial output and household spending are due out on Friday, hours before the government is to unveil an economic package to help people and firms cope with high energy and food prices. [ID:nT12484]

MINDFUL OF INFLATION RISK

Suda, regarded as keener than other board members to raise interest rates when conditions are ripe, said stabilising the inflation rate was indispensable to achieve sustainable growth in Japan, where the economy contracted in the second quarter.

"She talked a lot about inflation. Her speech made me convinced that the sole hawk in the June policy meeting minutes was Suda," said Mari Iwashita, chief market economist at Daiwa Securities SMBC.

"I don't think the BOJ will be able to make a policy change in the near future. But I think Suda's saying the important thing is whether oil prices will stop rising. If oil prices stabilise, and all the storms and fog hanging over the Japanese economy go away, then she will be willing to raise rates."

Suda repeated the central bank's stance that it will conduct monetary policy flexibly while watching both the risks of slowing growth and accelerating inflation, a comment often taken to mean that the BOJ is seen taking a neutral stance on monetary policy for now.

"We should not choose between focusing on risks to the economy and from inflation. That's a key point when we check risk factors," Suda said.

Japan's economy shrank in the second quarter as crumbling U.S. and European export markets hit factories, and consumers tightened their belts to cope with high food and fuel costs. [ID:nT110289]

Most Japan economy watchers, including government officials, say Japan is either heading into a recession or is already in one.

Japan measures a recession as a downturn in the economic cycle, which varies from the more widely used definition of two straight quarters of economic contraction. (Editing by Chris Gallagher)