HIGHLIGHTS 3-BOJ's Shirakawa: No risk of deflationary spiral

(For more stories on the Japanese economy, click [ID:nECONJP])

TOKYO Aug 11 (Reuters) - Bank of Japan Governor Masaaki Shirakawa said on Tuesday he saw no risk of Japan slipping into a deflationary spiral.

The Bank of Japan's low interest rates and measures to support corporate financing have helped keep the output gap in the economy from widening too much, thereby easing the downward pressure on prices, Shirakawa said.

He was speaking at a news conference after the central bank's policy board kept interest rates on hold and maintained its cautious view on the economy. [ID:nT328059] See also Instant View [ID:nT255238]

Following are key quotes from Shirakawa's news conference:

DEFLATION

"Prices are following a similar trend worldwide at the moment.

"Looking at the developed world, consumer prices have fallen except for certain countries like Britain. In the past one year, consumer prices have fallen by 4 percentage points on average. In sum, developing countries are facing falling prices and the pace of decline has accelerated...

"The world economy is facing a slump in economic activity and a widening of the output gap due to adjustments in various excesses that accumulated through the middle of 2000s and a rapid contraction in the financial sector since the collapse of Lehman Brothers last autumn.

"Price are falling as a reaction to declines in energy and resources prices since last year, but in addition, this also reflects changes in the global supply-demand balance...

"The economic shock this time around was big, so it will take a significant amount of time for downward price pressures to disappear...

"In the West, growth expectations and the price outlook are much lower than the potential growth rate and mid- to long-term price expectations, but they are expected to return to a sustainable growth path with price stability after a considerable period of time."

"We're watching to see that stability in financial systems is maintained and that medium- to long-term inflation expectations are not falling. Unless these two factors are satisfied a deflationary spiral could occur.

"At the moment, Japan faces no risk of falling into a deflation spiral. But we are carefully watching price trends given that underlying price falls are accelerating.

"In order to improve the outlook for prices, we are using extremely low interest rates and measures to support corporate finance."

ECONOMIC OUTLOOK "When we talk about the economy, we have short- and long-term moves, and it is always difficult to separate the two. In assessing the economy, we are watching very closely the impact of various fiscal and monetary policies and how the inventory adjustment cycle has proceeded.

"We are also looking closely at final demand, and we are still not very confident on this front once stimulus efforts have run their course. The reason for this is that the global economy has suffered a great shock. We can't expect to see an impressive recovery.

"One change from our policy meeting last month is that Asian economies seem to be growing at a faster pace. Since the spring, the financial system has also been improving.

"The overall direction is heading toward improvement. However, the overall level of activity is still low, so there is still some uncertainty."

"Western financial institutions are carrying out various adjustments in balance sheets, and the economy as a whole is going through adjustments in excesses that have built up in good times. These will be reflected in earnings and assets at financial institutions, so they still have to tackle problems in restoring their own health."

CORPORATE FINANCE

"One reason why the BOJ decided last month to extend measures to support corporate finance is the disparity in bond issuance from companies with high credit ratings and those with lower credit ratings.

"Not long ago, companies rated BBB were completely shut out of the bond market. However, last month three BBB-rated companies were able to sell bonds. This is a slight improvement from no issuance whatsoever, but we still need to be careful about corporate finance...

"We are expecting our corporate finance support steps to filter through to companies with low ratings, and we're watching to see if that is taking place." (Reporting by Leika Kihara, Tetsushi Kajimoto and Stanley White; Editing by Michael Watson)