HIGHLIGHTS 3-BOJ chief: timing of Japan recovery delayed

TOKYO Jan 24 (Reuters) - Bank of Japan Governor Masaaki Shirakawa said on Tuesday the central bank's board members agreed that the timing of Japan's economic recovery has been delayed somewhat due to the slowdown of the global economy.

Shirakawa also told a news conference that the euro's recent weakening against the yen could hurt Japan's economy by worsening corporate sentiment and eroding the competitiveness of Japanese exports overseas.

Earlier on Tuesday, the BOJ cut its economic forecasts and warned of risks posed by Europe's debt crisis but kept monetary policy steady after a rate review, counting on spending for reconstruction after last year's earthquake and tsunami to support the recovery.

Following are key quotes from Shirakawa's news conference:

EURO

"The impact of Europe's sovereign debt problems is felt through asset prices such as stocks and currencies. Recently, if not at this very moment, the yen has shown upward moves due to broad euro selling.

"In the current situation when uncertainty is high about overseas economies, we need to fully watch the possibility of the yen's rise having a negative impact on the Japanese economy.

"The euro's fall versus the yen could drag on Japanese companies' export competitiveness against European rivals. It could also hurt the economy by worsening corporate revenues and sentiment."

EUROPE

"There are various uncertainties to our main projections, and the biggest risk to the economy is how Europe's sovereign debt problems may unfold.

"It is already affecting Japan's exports and output through both direct and indirect trade channels.

"Close attention needs to be paid to the possibility that it could lead to weaker growth in world and Japanese economies through effects from global financial markets.

RECOVERY

"Regarding the timing of Japan's economic recovery, I and all other policy board members think it has been delayed somewhat. We have stated that recovery is expected in the first half of fiscal 2012/13."

TRADE BALANCE

"The current trade deficit stems from (last year's) nuclear power accident that led to an increase in thermal power generation as a replacement and rises in imports of crude oil and LNG. Also, domestic production capacity declined in the short term (after last year's earthquake), contributing to the trade deficit.

"But I do not see this trend continuing through the mid-2010s because the current factors are temporary.

"Japan's past current account surpluses have helped the nation accumulate overseas assets and they now generate great amounts of profits such as dividend payouts. Income gains are thus on the rise. I don't think the current account deficit will become a trend toward mid-2010s."

DELEVERAGING IN EUROPE

"Recent developments in Europe's sovereign debt problems show strains in funding markets have eased somewhat due to the ECB's massive fund supply and dollar funding operations by central banks from six countries. But overall, uncertainty remains strong.

"Behind this is the fact that Europe has not come up concretely with a definite plan to boost the so-called firewall or firepower needed to contain market turmoil.

"Each country is moving towards strengthening fiscal discipline but it will take time for such efforts to take concrete shape, therefore they have failed to dispel market concern about fiscal sustainability.

"Europe's sovereign debt problems are already weighing on European economies but they could further push down their economies depending on future developments. As each country is forced to tighten their purse strings, economic growth could become weaker with households and companies growing cautious about spending.

"European financial institutions that hold a lot of European government bonds may increasingly move towards deleveraging to squeeze their assets due to fund raising concerns, putting downward pressure on the economy.

"Effects from deleveraging by European financial institutions could spill over globally. This deleveraging has not yet greatly weighed on emerging economies at the moment. But close attention should be paid to whether this deleveraging may negatively affect the Middle East and Asia where Europeans have a large share of trade and financial activity."

IMF

"Europe's sovereign debt problems pose the biggest risk to the world and Japanese economies and if the situation worsens further, it could cause a contraction in global financial markets and seriously affect not only the euro zone but also other countries, particularly in emerging markets.

"To avoid such a situation, the IMF can play two vital roles. One is to help the countries concerned stabilise their funding and retain market trust by setting standby loans and a flexible credit line.

"The other is to encourage countries in need of support to ensure discipline in carrying out fiscal rebuilding and structural reforms by urging them to abide by the so-called conditionality while utilising the IMF's surveillance functions.

"European countries centring on the euro zone and ECB are continuing efforts to create a strong firewall to contain the sovereign debt problems at this stage. We need to make overall judgments taking into account the results of Europe's own efforts when we assess the sufficiency of IMF resources and consider strengthening them as needed.

"Europe's thorough efforts would be a precondition and then as the G20 communique states, other countries outside of Europe would be asked for cooperation. That's the basic thinking."