HIGHLIGHTS-BOJ gov:must not focus just on short-term price moves

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TOKYO Dec 22 (Reuters) - Bank of Japan Governor Masaaki Shirakawa said on Tuesday that the economy would be destabilised if the central bank guided monetary policy based on short-term price moves.

Following are key quotes from his speech:

MONETARY POLICY

"Looking back at price developments in the past quarter century, inflation gradually declined and it can be said that many central banks have been successful in terms of achieving price stability.

"However, in terms of financial system stability, the frequency of bubbles and financial crises has increased in the past quarter century, with major episodes including Japan's financial crisis following the burst of the bubble, the East Asian financial crisis, the credit bubble in the United States and Europe, and the recent global financial crisis.

"Moreover, ironically, all these bubbles arose in an environment of low inflation. While the causes of bubbles are complex, one major cause in all cases has been the emergence of a sense that liquidity is always available at the drop of a hat.

"While I do not think that accommodative monetary conditions alone can lead to a bubble, it seems that it also cannot be denied that expectations of a prolonged accommodative monetary environment lead to excessive leverage and maturity mismatches, thereby accelerating the generation of a bubble.

"Price stability is an extremely important policy objective for a central bank, but if a central bank conducts monetary policy by just watching short-term price developments, this may induce large economic fluctuations and result in harming price stability in the medium to long term." (Reporting by Rie Ishiguro)