HIGHLIGHTS 6-BOJ's Nakamura: too early to end fund support steps

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NIIGATA, Japan, June 24 (Reuters) - Bank of Japan policy board member Seiji Nakamura said that judging from current severe corporate funding conditions it is too early to let BOJ measures aimed at easing credit strains expire in September.

Nakamura, formerly a shipping firm executive, was among the four dissenters when the BOJ cut rates to 0.3 percent in October last year, calling instead for a cut to 0.25 percent. He has voted with the board and toed the BOJ's official line since then.

Following are key quotes from his speech at a meeting with business leaders in Niigata, northwest of Tokyo, and a news conference that followed:

CORPORATE FINANCE

(From speech)

"The environment for corporate finance may remain severe on the whole. Financial markets are improving, but have not yet normalised."

"But because the measures taken so far are extraordinary steps for the central bank, it's important to keep them in place only up to a size and for a period deemed necessary.

"We should study what to do with all the measures that will expire in September without any preconceived ideas."

(From news conference)

"We still have time until September so we want to look at next month's BOJ tankan survey in deciding whether the current fund-support steps need to be extended.

"Looking at underlying conditions, it's true there is an increase in issuance of corporate bonds. But looking at the overall picture, the yield spread between bonds issued by companies with BBB credit ratings (and government bonds) remains high. Financial markets also remain jittery.

"While corporate financing conditions have become much easier than in the past, they are still severe overall ... When looking at current conditions, I think it's too early to end the fund-support steps.

"We still have about one or two months to decide, so I want to consider various factors thoroughly. But they are unconventional steps, so we always need to examine whether they are necessary. We always need to think of an exit strategy ...

"As for commercial paper and corporate bond buying, it's true they serve as a safety net ... Some people say the measures could be left in place (even if the need for them diminishes). I don't think so because their very existence affects economic activity. The BOJ should end them if they are no longer necessary ...

"We need to avoid announcing our decision in a way that surprises markets as that would cause undue confusion ...

(Asked if the timing of deciding on whether to extend the steps would be shortly after the BOJ tankan release in July:)

"For such unconventional steps, we need to examine conditions until the last minute. But we can't wait for too long. It's hard to say whether it will come next month or in August."

JGB BUYING, BOND YIELDS

(From speech)

"If we allowed our long-term JGB holdings to surpass outstanding bank notes and we needed to absorb a lot of money from money markets, then short-term money market operations wouldn't be enough and we would possibly have to sell longer-dated JGBs.

"This would not only remarkably lower the flexibility of money market adjustments, this would also be an obstacle to monetary policy, a source of turbulence in the bond market and a blow to the credibility of the BOJ's monetary policy.

"The law clearly states that with the exception of parliamentary approval, the BOJ can't underwrite government bonds, which makes it clear that the purpose of our JGB buying under the bank note rule isn't to support JGB prices or finance government spending."

(From news conference: On BOJ's self-imposed rule of capping its JGB holdings to the balance of yen notes in circulation)

"As for the bank note rule, it's not that it is preventing the BOJ from easing monetary conditions and providing necessary funds to the market ...

"Long-term interest rates have stabilised somewhat after rising ... It might be due to declines in stock prices just recently as well as an unwinding of overly optimistic views on the economy.

"As a trend, bonds have been overbought since the Lehman crisis and that's being unwound. After some fluctuations, I believe bond prices will stabilise at appropriate levels."

JAPANESE ECONOMY "So far, the Japanese economy is tracking the scenario (in the BOJ's outlook.) "In light of Japan's demographics and industry structure, it's hard to expect a recovery driven by a large expansion in domestic demand. Therefore we will continue to rely on foreign demand.

"However, it will likely take considerable time to adjust various distortions in the world economy. Recovery in overseas economies will likely be moderate and it will take considerable time for the Japanese economy to make a full-fledged recovery. (Reporting by Leika Kihara)