HIGHLIGHTS 3-BOJ Shirakawa says latest step not aimed at forex

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

TOKYO, March 17 (Reuters) - Bank of Japan Governor Masaaki Shirakawa said on Wednesday the expansion of the bank's fund supply operation was not directly aimed at influencing currency rates.

The central bank chief was speaking after the BOJ decided to ease monetary policy further as expected, doubling the scale of the money supply tool it adopted in December, though it left the duration of fixed-rate loans to banks at three months.

Two of the seven board members dissented, suggesting the board may have had difficulty justifying the move as the economy is recovering.

Following are key quotes from Shirakawa's news conference:

FOREX

"It would not be appropriate for the BOJ to guide monetary policy with the aim of directly affecting currency moves ...

"If the market's understanding of the BOJ's easy policy stance broadens, the latest step may have such effects (of pushing down the yen)."

ECONOMY

"The economy is somewhat overshooting the BOJ's forecasts. The latest step is aimed at ensuring improvements in the economy and prices."

IMPACT OF FUNDING OPERATION

"When we look at what first happened after we introduced the three-month operation in December, it caused term rates to fall, it caused lending rates to fall and it also stopped a deterioration in corporate sentiment, which was reflected in stock prices and the currency market.

"This shows that our easing measures have had some impact and we believe they will continue to do so, and this is behind our decision today.

"Part of the mechanism is that the funding operation can push down longer-term rates, which can then feed into private demand and then into prices."

QUANTITATIVE EASING

"The latest step is not quantitative easing because we do not target financial institutions' deposits at the BOJ. But the BOJ is providing more funds in order not to restrict activities of financial institutions and companies ...

"The latest step is additional monetary easing. We are employing available tools to contribute to improving the economy and overcoming deflation ...

"If the BOJ's easing stance is understood more broadly, it should have positive effects on the economy. But the latest step alone will not clear up the cloud hanging over the Japanese economy."

DEFLATION

"It will take a long time for Japan to overcome deflation. We have to calmly accept that it will take time for improvements in the output gap to feed into prices.

"Still, rising prices in themselves aren't good for this country's citizens, as they could lead to higher input prices and work against the government's finances.

"What we really want is for prices to rise as a result of improvements in the economy. This is why we will be persistent in our accommodative monetary policy."

POLICY DEBATE

"When we take any measure it is vital for us to consider the benefits, the side effects and the amount of time required. Today's decision was difficult, because money market operations could lower the functions of the money market.

"Financial institutions' earnings are also based on certain interest rate expectations, so lowering short-term rates could potentially hurt their earnings.

"But if we help increase fund procurement opportunities in the end, our steps have positive effects overall." (Reporting by Rie Ishiguro and Stanley White; Editing by Michael Watson)