The Bank of Japan needs to raise interest rates to prevent excess borrowing that helped trigger the U.S. subprime mortgage crisis and subsequent financial-market turmoil, central bank Policy Board member Atsushi Mizuno said Thursday.

"Overinvestment amid conditions of ample global liquidity was a major factor in causing the subprime issue," Mizuno said in a speech in Kofu, Yamanashi Prefecture. The market turmoil "is proof that keeping rates at levels that stray from fundamentals may actually cause instability."

Since July, Mizuno, 48, has been the lone advocate on the BOJ's Policy Board of raising interest rates. The BOJ's 0.5 percent short-term rate, the lowest in the industrialized world, has encouraged investors to borrow in Japan to seek higher returns abroad in so-called carry trades.

"The need to trim excessive liquidity, a factor behind the subprime loan problem, may justify the Bank of Japan raising rates in the medium-to-long term," said Seiji Adachi, a senior economist at Deutsche Securities Inc. "But a rate hike now could exacerbate financial-market turmoil."

Rising mortgage defaults by U.S. borrowers with poor credit histories led investors to sell risky assets funded by yen loans, exacerbating currency and stock price movements. The yen has risen more than 20 percent against the New Zealand dollar since mid-July.

Reserve Bank of Australia Gov. 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."

Mizuno's calls for rate increases have been rejected by his fellow board members, who voted to keep them on hold last week out of concern the market tumult could threaten economic growth.

BOJ Gov. Toshihiko Fukui and his board embarked in July 2006 on a strategy of "gradually" raising borrowing costs. In the previous decade the BOJ had cut rates to zero percent twice to pull the economy out of a tussle with falling prices and to repair a financial system mired with bad debts from the asset bubble.

With the key rate at 0.5 percent, borrowing money in Japan is cheap compared with Europe's 4 percent, the 5.25 percent in the U.S. and New Zealand's 8.25 percent.

Fukui said Aug. 23 that keeping interest rates too low may spur risky investments.

"Distortions and the misallocation of resources could occur if interest rates are kept at levels inconsistent with the economy," Fukui said, signaling the BOJ still intends to raise borrowing costs.

Mizuno said the shortage of credit that prompted central banks to inject billions of dollars into money markets over the past month probably won't affect economic growth.