HIGHLIGHTS 5-BOJ's Shirakawa says shares govt deflation view

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NAGOYA, Japan Nov 30 (Reuters) - Bank of Japan Governor Masaaki Shirakawa said the central bank shares the government's view that Japan is in moderate deflation, and that it is ready to act decisively when needed to ensure market stability.

Shirakawa is expected to meet Prime Minister Yukio Hatoyama this week, and a government spokesman said the two may discuss the possibility of the BOJ adopting quantitative easing, a policy of flooding markets with extra cash to promote lending.

Following are key quotes from Shirakawa's speech and Q&A with business leaders in Nagoya, central Japan, as well as from a news conference that followed.

For the English text of the speech, go to: link.reuters.com/zas93g

FOREX

(From meeting with business leaders)

"The government, not the BOJ, decides whether to intervene in currency markets ... The BOJ will closely examine how currency rate volatility could affect the economy.

"We will patiently maintain an easy monetary policy, and I expect this to have some effect on currency rates."

(From news conference)

"It's undesirable for currency volatility to heighten. As the G7 nations have said in their statement, that is the will of each country's government and the central bank.

"Currency markets have recently been unstable. We're looking at big currency market developments and their impact on the economy."

(Asked if the BOJ might buy foreign currency-denominated bonds to weaken the yen) "Under the law, the government is responsible for buying foreign currencies to influence exchange rates. The BOJ will act in accordance with law."

DEFLATION

(From meeting with business leaders)

"The government recently expressed its view that the Japanese economy was in a mild deflationary phase in that the decline in prices was continuing. The BOJ's judgment on prices presented at the end of October is based on the same recognition ...

"In coping with deflation, the key is to keep improving the supply and demand balance of the economy as a whole, and to prevent a vicious circle between economic activity and prices, especially to maintain the stability of the financial system.

"Based on such thinking, the Bank will do its utmost to overcome deflation both in terms of monetary easing and ensuring the stability of the financial markets."

(From news conference)

"It's desirable to have various forums to exchange views with the government. I hope to understand the government's economic and price assessment, while conveying our assessment.

"The BOJ will ultimately determine monetary policy after close communication with the government. I plan to explain to the prime minister that the BOJ's goal is to achieve sustained economic growth with price stability."

MONETARY POLICY

(From meeting with business leaders)

"In October this year, the Bank again expressed its aim to maintain an extremely accommodative financial environment and provide steady support for Japan's economy, and I will emphasise again today that the Bank firmly maintains such a stance.

"In terms of the effects of monetary easing, it is important to ensure the stability of financial markets. Ensuring financial market stability is a responsibility as a central bank, and I will reemphasise that the Bank is always prepared to act promptly and decisively if it is judged necessary to ensure the stability of financial markets ...

"We have absolutely no plans to prepare an exit from our easy policy ... We had some financial market developments last week. If we experience financial market turmoil again, the BOJ will act aggressively and decisively."

(From news conference)

(Asked whether the BOJ will consider increasing government bond purchases in the future) "I can only say that the BOJ will examine the most appropriate monetary policy judging from economic and financial developments at the time ..."

"The BOJ is striving to maintain financial market stability through ample liquidity provision. The financial market is a living thing, so we'll always think of how best to maintain market stability. In any case, we're in a position now to provide ample liquidity to the market."

ECONOMIC OUTLOOK

"As for the outlook, the pace of improvement in Japan's economy is likely to remain moderate until around the middle of fiscal 2010 as pressures for adjusting employment and wages are likely to remain.

"In fact, it cannot be denied there is a possibility that the momentum for Japan's economic recovery will temporarily slow around the spring of 2010, when the effects of economic stimulus measures wane at home and abroad.

"The Bank pays due attention to the effects of the recent rapid appreciation of the yen on business sentiment of the firms that are on the road to recovery, as well as to the effects of international financial developments since last week on the financial markets ...

"I hold a very cautious view of Japan's economy. On the other hand, I don't think the economy is continuing to worsen further." (Reporting by Leika Kihara, Stanley White and Hideyuki Sano; Editing by Michael Watson) ((hideyuki.sano@thomsonreuters.com; +81 3 6441 1827; Reuters Messaging: hideyuki.sano.reuters.com@reuters.net))