HIGHLIGHTS 3-BOJ Shirakawa quotes from news conference

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TOKYO, June 16 (Reuters) - Bank of Japan Governor Masaaki Shirakawa said on Tuesday that corporate financing has improved but the bank must monitor market developments before and will decide by September whether to extend measures it has put in place to ease credit strains.

Shirakawa also said the recent rise in Japanese long-term government bond yields was partly due to market expectations that the economy was levelling out.

The central bank upgraded its assessment of the economy on Tuesday for a second straight month while keeping interest rates on hold at 0.1 percent, as widely expected. [ID:nT50494]

The following are key quotes from Shirakawa at a news conference:

EXIT STRATEGY:

"Many steps of specified duration have been taken, and their purposes and structures differ from each other and their impacts on financial markets and financial conditions vary. So we'll need to consider how to deal with each of these temporary measures.

"Specifically, how economic and financial markets develop will be the most important factor in making a judgment on each of the steps.

"We will carefully examine market developments and the effects of each of the steps and decide appropriately by the end of September in a way that is predictable for the markets.

"Any central bank, including the BOJ, understands that when it puts unconventional measures in place it needs to remove those measures once they become unnecessary. It would cause uncertainty if a central bank wasn't thinking along those lines. Central banks are always thinking about how to end their unconventional measures. "The BOJ took unconventional steps because we were facing extreme conditions. If we continue unconventional steps without end, that could distort markets and cause risks to prices and the economy. Central banks that have taken extraordinary measures are considering how to exit these strategies.

"Each central bank will decide on its specific exit strategy based on their own circumstances."

BOND YIELDS:

"Japanese long-term interest rates are rising moderately compared with Europe and the United States. While share prices are moving firmly, market expectations for the economy to level out are behind the yield rise.

"However, Japan's finances are severe. In order to avoid a premium in the markets, it is important to have fiscal discipline.

"Recently, long-term rates in the U.S. have been moving a lot. This is due to the fact that extreme pessimism on the U.S. economy is receding. There is also less fear about the financial system, and this is impacting investor flows. There are also concerns about the U.S. budget deficit."

JGB BUYING

"The first reason (why the BOJ has self-imposed rules on JGB buying) is that we need to carry out financial market adjustments appropriately, and the second reason is to avoid monetising government debt.

"The big difference between Japan and the United States is that short-term fluctuations in current accounts are large in Japan. In view of that, it is not desirable to abuse long-term government bond buying operations from the point of view of the stable formation of long-term government bond markets.

"Any central bank, including the BOJ and the Federal Reserve, is always thinking about the way to swiftly terminate extraordinary policy steps when they become unnecessary.

"If central banks don't think about that, financial markets will become highly unstable. The specific design of policies depends on financial markets in each country and their central banks' law, but every central bank is always giving careful consideration to this."

JAPAN ECONOMY

"The economy is moving largely in line with the projections in our outlook report issued at the end of April. Economic conditions have begun to stop worsening after deteriorating significantly."

CORPORATE FINANCE

"Financial conditions have shown moves towards further improvement as CP and bond issuance conditions have turned more for the better.

"But as a whole, conditions remain tight and we'll closely examine financial conditions from now on including the result of next month's tankan.

"There is a rush of issuance of corporate bonds in Japan. But for borrowers rated BBB or below, they have basically been shut out of the market since the collapse of Lehman Brothers, so you can say credit markets are polarised.

"Even though inventory adjustments have proceeded, I don't think companies are expecting an economic recovery in the near term, and we still cannot have confidence in corporate finance. These are areas that we at the BOJ want to examine in the future." (Reporting by Leika Kihara, Tetsushi Kajimoto, Stanley White; Editing by Hugh Lawson)