Japan Monitoring Yen's Rise, Economy

Meanwhile, a board member of the Bank of Japan said the central bank must carefully watch how problems in the U.S. housing market might affect Japan's economy, suggesting that he doesn't see an imminent need to raise interest rates.

Worries about weakness in the U.S. economy -- Japan's biggest export market -- and recent volatility in global financial markets have driven the dollar to a 2 1/2-year lows, touching 108.25 overnight. A strong yen hurts Japan's exporters by eroding their foreign-earned income.

Asked about the dollar's drop, Finance Minister Fukushiro Nukaga told Dow Jones Newswires that "we will closely watch that issue."

Nukaga expressed caution about the outlook for Japan's economy, repeated that the government must closely monitor how the subprime mortgage crisis affects consumer spending in the U.S.

Separately, Bank of Japan board member Seiji Nakamura said that Japan's economy may suffer if problems in the U.S. housing and banking sectors become more severe or fluctuations in financial markets increase.

"The global economy may deteriorate if the U.S. economy sharply worsens," he said. "There is also the possibility that the Japanese economy may be negatively influenced."

The BOJ last raised interest rates to 0.5 percent in February. Many market players now believe the BOJ won't raise rates before the fiscal year ends in March.

Nakamura stressed that leaving monetary policy too easy for too long carries its own risks.

"Real interest rates remain at very low levels. If the expectation takes hold that interest rates will remain low for a long time, it will produce distortion in price formation in the market and allocation of resources. We have to cautiously watch the risk," he said.

But he offered few hints to the timing of the next rate hike.