Aug. 30 (Bloomberg) -- Overinvestment was a major cause of the U.S. subprime mortgage crisis and illustrates why the Bank of Japan needs to raise interest rates, central bank policy maker Atsushi Mizuno said.
``Overinvestment amid conditions of ample global liquidity was a major factor in causing the subprime issue,'' Mizuno said today in a speech in Kofu, Japan. The market turmoil ``is proof that keeping rates at levels that stray from fundamentals could actually cause instability.''
Since July, Mizuno, 48, has been the lone advocate of raising rates, arguing that keeping borrowing costs too low could fuel risky investment and hurt economic growth in the long term. The bank's 0.5 percent short-term rate, the lowest among major economies, has encouraged investors to borrow in Japan to buy higher-yielding assets abroad in so-called carry trades.
Mizuno's calls for rate increases have been rejected by his fellow board members, who voted to keep them on hold last week after the market turmoil. Losses on U.S. subprime mortgages drained liquidity from markets, causing global stocks to plummet and the yen to surge as investors sold riskier assets funded by loans in Japan.
Reserve Bank of Australia Governor Glenn Stevens said this month that ``the sooner the Japanese interest rates are able to be normal again, the better from the point of view of the global financial system.''
Central banks in the U.S., Europe and Japan pumped more than $350 billion in the banking system and the Federal Reserve cut the rate at which it lends to banks to ease access to credit.
Small Effect
``We can expect the repricing process in financial markets to move forward once the current liquidity issues subside,'' Mizuno said. ``The chances of this having a serious impact on the real economy are small.''
Mizuno said there's no reason for the bank to lower its forecasts for economic growth and inflation following the subprime collapse and resulting financial-market instability.
``While it's possible that the U.S. economy could slow a bit more than expected, this may be absorbed by solid global growth,'' he said, while adding that the subprime issue remains ``a risk.''
Investors are scaling back expectations for a September rate increase. They now see a 22 percent chance of a move at the Sept. 18-19 meeting, down from 36 percent at the end of last week, according to Credit Suisse Group calculations based on interest payments.
Prices have failed to pick up even as the economy grows. A report tomorrow is expected to show consumer prices excluding fresh food fell 0.1 percent in July from a year earlier, a sixth monthly drop, according to the median estimate of 40 economists.
