HIGHLIGHTS-BOJ's Shirakawa: hard to avoid global slowdown

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NAGOYA, Japan, Sept 2 (Reuters) - Bank of Japan Governor Masaaki Shirakawa said on Tuesday it will be hard to avoid a slowdown in the world economy, although historically growth remains at a high level.

In a speech to business leaders in Nagoya, central Japan, he stuck to the view that Japan's economy is likely to return to moderate growth, but warned about the risk of a prolonged period of easy monetary policy by the central bank.

Following are some key comments from Shirakawa's speech:

The English version of the speech text is available at

here

MONETARY POLICY

(in a speech to business leaders)

"We need to be careful of the risk of maintaining monetary easing for a prolonged period. Looking not just at the subprime mortgage loan problem but at Japan's 'bubble' economy and past experiences of overheating in financial activity and asset prices, many of them emerged after rates were kept low and when prices were stable.

"It's very hard to grasp real-time the emergence and the bursting of an economic bubble. That is why we need to be mindful that excessive monetary easing, after a while, could create big swings in the economy."

JAPAN ECONOMY

(in a speech to business leaders)

"Our main scenario is that the economy is likely to be sluggish for the time being due to the impact of high energy and raw material prices, as well as due to slowing export growth on a global economic slowdown ...

"The question is whether the Japanese economy would fall into a deep adjustment phase. We believe the possibility of this happening is small ...

"Japan's overall monetary conditions are accommodative. Overnight call rates are still low at 0.5 percent and, after subtracting the rate of rise in consumer prices, real short-term interest rates are negative. Businesses' financing costs also remain low. These monetary conditions are expected to support corporate activities."

OVERSEAS ECONOMY

(in a speech to business leaders)

"The U.S. economy will likely remain sluggish for the time being ... European economic growth is also slowing. In Asia, China and India have sustained high growth but NIEs and ASEAN economies are faced with weakening export growth and signs of worsening domestic demand.

"Global economic growth remains at a high level compared with its average in the past 30 years, but a slowdown seems hard to avoid."

(in a Q&A session after a speech to business leaders)

"In the big picture, I've been left with the impression that emerging economies have been affected by the slowdown in the world economy. But I do not expect their growth to fall sharply."

(in a news conference)

"I think energy and raw material prices have risen basically because of the supply-demand balance. It's been not very long since they started falling but if they continue to fall, I think that probably reflects the slowdown in the world economy."

INFLATION

(in a speech to business leaders)

"Underlying rises in consumer prices are exceeding the upper range of what we understand as medium- to long-term price stability. But what needs to be examined in achieving price stability is whether the price moves are sustainable in the medium to long term ...

"At present, there is no sign of second-round effects emerging (from high raw material costs) when looking at households' inflation expectations and companies' price-setting activities. One important set of data in determining whether there are second-round effects is wage data, but wage growth is weakening now.

"Consumer prices will sustain somewhat high growth for the time being as import price rises are passed on. But the pace of consumer inflation will then gradually slow as commodity price rises moderate and price hikes (in Japan) run their course."

FISCAL REFORM

(in a question and answer session after a speech to academics)

"Past experience shows that a deterioration of the fiscal balance causes various problems in the economy.

"As a central bank, we are very much interested in long-term interest rates. Japan's long-term interest rate is around 1.5 percent now. That's because market players do not expect inflation. If they think only inflation can solve Japan's debt problems, rates will rise."

"Right now, people believe the BOJ won't take such steps. So efforts to maintain the fiscal balance are important, while in our role as a central bank it is important that we conduct our monetary policy to achieve price stability." (Reporting by Hideyuki Sano; Editing by Edwina Gibbs and Chris Gallagher)