HIGHLIGHTS 4-BOJ's Suda: won't rule out any policy options

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KOFU, Japan Dec 2 (Reuters) - Bank of Japan board member Miyako Suda said on Wednesday the central bank would not rule out any policy options as it aims to adopt the most effective monetary adjustment methods.

Suda also said she did not think the risk of a deflationary spiral was rapidly rising.

The central bank decided on Tuesday to make 10 trillion yen ($114.9 billion) of three-month funds available to the banking system at 0.1 percent.

Following are key quotes from her speech and a news conference that followed:

MONETARY POLICY

"The costs and benefits (of any policy options) can change depending on the situation in financial markets. We are always open as to what will be the best policy measures.

"We need to remain cautious about suspicions on fiscal discipline boosting long-term bond yields. Monetisation of public debt by a central bank can strengthen doubts about fiscal discipline.

"The size of our balance sheet does not necessarily show the degree of monetary easing.

"If market functions deteriorate, making funding conditions tight as in the latest crisis, we need to provide funds aggressively. On the other hand, if market functions recover and investors become eager to offer funds, the BOJ's fund provision will fall. As such, if our balance sheet shrinks, that does not mean the degree of monetary easing shrinks."

(At news conference)

"The BOJ conducts policy to help the economy return to a sustainable growth path with price stability and it is important to show that we are ready to take decisive measures if economic development greatly undershoots our forecast."

"This time we are aiming to respond to all the funding demand that exists at low interest rates. Apart from such a direct effect, people's sentiment is withering, so I thought it was important to act now.

"When people talk about deflation, the discussion won't stop there ... Many people are saying that the economy will worsen and prices will fall ahead. If we left that unattended, sentiment would further deteriorate and of course it will have the effect of lowering interest rates even slightly."

CURRENCIES

"We must be aware of the risk that inflation expectations could fall if the yen's sudden rise is seen as harming the economy."

(At news conference)

"BOJ cannot purchase foreign currency-denominated bonds as a means to influence currency rates.

"I once thought it could legally be possible if it was used as a monetary adjustment tool. But I had not checked with legal experts in making such a judgment."

DEFLATION

"The textbook definition of deflation is constantly falling prices, and if you follow that definition, then you can say we are currently in deflation.

"If prices fall longer than expected, this could lead consumers to delay consumption, which would cause corporate earnings to worsen and weigh on the economy. This in turn could cause inflation expectations to fall, which would feed into further price declines and increase the risk of a deflationary spiral.

"There are both upside and downside risks to prices. If you take a slightly long-term view, global monetary easing could spark investment flows into commodities, which could lead to a price spike in commodities that could cause inflation to rise more than expected. We need to continue to keep this risk in mind.

"Wages do hold an important key. In Japan, the unemployment rate hasn't deteriorated as much as in other developed countries. However, the decline in Japan's wages is relatively bigger, and there is a tendency in Japan to reduce labour costs by cutting wages instead of by firing workers.

"The pace of annual declines in the consumer price index may slow to around 1 percent by the end of this year, but there will still be a lot of downward pressure on prices, so the extent of price declines will moderate at a very slow pace."

(At news conference)

"I don't think the risk of a deflationary spiral is rapidly rising."

ECONOMY

"Expansionary macroeconomic policies taken worldwide have the upside risk of boosting economies more than anticipated and also the downside risk of a sharp downturn after overheating.

"I feel that the latter risk is rising among emerging economies and resource-rich countries.

"If the effect of various stimulus measures dwindles, real GDP growth could slow from high levels recorded in the early half of this fiscal year and it could even turn negative temporarily. But in 2011/12, as the world growth rate will pick up, recovery in the Japanese corporate sector, sparked by exports, will spill over to the household sector, boosting Japan's growth rate.

"If we look towards 2011/12, emerging economies and resource-rich countries will continue robust growth while capital markets continue to improve despite some remaining vulnerabilities. I therefore think risk on the economy and prices will be balanced."

(At news conference)

"The economy and prices are moving in line with our forecasts presented in the outlook report, and they are close to neutral in terms of upside and downside risks.

"There may be a slight difference in that downside risks are somewhat bigger near-term but upside risks will be larger beyond that, so I have judged that overall they are in balance." ($1=87.04 Yen) (Reporting by Tetsushi Kajimoto; Editing by Michael Watson) ((tetsushi.kajimoto@thomsonreuters.com; +81 3 6441-1829; Reuters Messaging: tetsushi.kajimoto.reuters.com@reuters.net)) ((If you have a query or comment on this story, send an email to news.feedback.asia@thomsonreuters.com))