HIGHLIGHTS 6-BOJ's Noda: not optimistic on corporate finance

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MATSUMOTO, Japan, July 30 (Reuters) - Bank of Japan policy board member Tadao Noda said on Thursday he was not optimistic about corporate financing conditions for the time being.

Noda, a banking industry veteran, also said the BOJ had no policy tools with which to directly influence long-term interest rates in a lasting way, even though bond markets could react in the short term when central banks announce government bond-buying.

Below are key quotes from Noda's speech to business leaders in Matsumoto, central Japan and a news conference that followed:

EXIT STRATEGY

"Markets are focusing on the BOJ's exit policy, or how long the bank will maintain the various temporary steps taken so far. What's most important for an exit policy is the timing.

"Maintaining the unconventional steps for an unnecessarily long period of time could hamper an autonomous adjustment of financial markets and the economy, causing big swings in the economy and prices. On the other hand, changing policy too early could cause problems, so we of course need to avoid that."

(Asked at news conference whether the BOJ could have a commitment that would give market players a sense of time frame in conducting policy, such one as used when it had vowed to keep quantitative easing in place until the annual gain in core consumer prices stayed steadily above zero.)

"I don't have in mind such a time frame-based policy as adopted in the past. But in the longer perspective, we have no predetermined view on every policy step, so it could be one choice if you ask me."

DEFLATION

"The core consumer price index will likely post annual falls of around 2 percent in July-September in reaction to last year's sharp rises in oil prices. After that, the effect of such oil price moves will fade and the economy is expected to pick up, so declines in the CPI will likely narrow.

"What I'm looking carefully for in examining the outlook for prices is to what extent the worsening supply-demand balance in the economy is affecting prices.

"Japan's medium- and long-term price expectations have been relatively stable and anchored. I don't think the risk of this changing and causing a deflationary spiral - or a negative cycle of price falls and economic worsening - is rising. But even so, I hope to carefully examine various price data."

(Asked at news conference about the BOJ's understanding of price stability)

"The timespan in which we measure medium- to long-term price stability may have changed from several years before, given that the economy has faced a big shock ... We haven't yet started discussing the price outlook for fiscal 2011/12 and beyond."

JAPAN ECONOMY, CORPORATE FINANCE

"Japan's economy is expected to pick up towards the latter half of this fiscal year with price falls expected to narrow. That's our main scenario for the time being. I say 'for the time being' because it's based on condition that overseas economies will recover. The biggest risk to our main scenario is whether overseas economies, particularly the U.S. economy, picks up or not ...

"Japan's financial conditions, in a word, remain tight but continue to improve ...

"As for the outlook, I can't be optimistic about the corporate finance environment because backward-looking fund demand is expected to arise as companies restructure their operations, while it is highly uncertain when there will be a genuine recovery in final demand."

LONG-TERM INTEREST RATES

"If the path towards fiscal restoration is unclear, the BOJ's government bond buying will be mistaken as monetisation of government debt and could push up long-term interest rates through an increase in risk premium. We must be mindful of this factor.

"If long-term interest rates rise faster than what would be justified by an economic recovery, it would weaken the economy's already fragile ability to improve. We shouldn't let our guard down against this risk."

(Asked about the view that government bond buying by central banks has a temporary announcement effect on long-term interest rates, but cannot guide bond prices to a certain level)

"What I wanted to say was that the temporary effect is different from that of having a long-term impact. The short-term effect will disappear as days go by, but our basic stance is to conduct policy from a medium- to long-term perspective.

"We won't take policy steps just because there's such a short-term announcement effect."

(Asked if the BOJ will take any policy steps to curb long-term interest rates)

"The BOJ has policy tools only to influence short-term interest rates, basically through a target rate. And we have taken steps that influence longer term rates since last year or the beginning of this year.

"But we don't have any policy tools that would directly influence so-called long-term interest rates." (Reporting by Tetsushi Kajimoto)