UPDATE 6-BOJ says to hold emergency meet on Tues

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By Leika Kihara

FUKUOKA, Japan, Dec 1 (Reuters) - The Bank of Japan will hold an emergency meeting on Tuesday and Governor Masaaki Shirakawa warned credit strains were driving up corporate borrowing costs at the fastest pace since Japan's financial crisis a decade ago.

The BOJ policy board will hold a meeting from 1 p.m. (0400 GMT) on Tuesday to discuss measures to help corporate finance, and Shirakawa will hold a news conference at 3:30 p.m. (0630 GMT), the central bank said.

Shirakawa, in a speech in southern Japan on Monday, gave his most downbeat assessment of the economy to date, convincing many analysts he is ready to take action to ease credit market conditions, but not necessarily an imminent interest rate cut.

"Although the level of interest rates (charged to companies) is somewhat lower than in 1998 and 1999, when corporate financing experienced a period of increased pressure, the so-called credit crunch, the pace at which these rates are rising is comparable to that in 1998 and 1999," Shirakawa said.

Economics Minister Kaoru Yosano also warned that Japan faces deflation despite planned government stimulus measures to fight the first recession in seven years.

Shirakawa said sluggishness in economic activity had increased rapidly, as shown in weak output data last week, and that had heightened the chance of Japanese annual consumer inflation briefly turning negative in the fiscal year starting next April 1.

"Data released last week, such as industrial output, showed the economy in a severe state," Shirakawa told an audience in Fukuoka.

"Sluggishness in economic activity has increased rapidly. Overseas economies are experiencing the same kind of rapid change."

Although that was a more cautious view of the economy than he has expressed before, Shirakawa stressed in a news conference that further cutting the nation's already very low interest rates could cause problems in smooth functioning of money markets.

"Shirakawa has grown increasingly cautious about corporate financing markets, suggesting the BOJ wants to help facilitate funding by firms as early as possible," said Hiromichi Shirakawa, chief economist at Credit Suisse.

"Looking at recent data such as industrial output, there may be a possibility that the BOJ will cut interest rates. But I don't think that will happen by the end of this year, unless it drastically downgrades its view on the economy further."

Still, some analysts say the central bank could cut the key policy rate again by the end of the current financial year in March, if economic conditions worsen dramatically. It trimmed the rate to 0.3 percent from 0.5 percent in October,

Economics Minister Yosano was similarly downbeat.

"I cannot tell you it will be a bright next day. The time for endurance has come," Yosano told the Financial Times in an interview published on Monday.