HIGHLIGHTS 2-BOJ Shirakawa says deflation, low rates to stay

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TOKYO, Nov 4 (Reuters) - Bank of Japan Governor Masaaki Shirakawa said on Wednesday that downward pressure on prices would likely persist in Japan for some time.

He also said that the central bank's decision to end its commercial paper and corporate bond purchases in December did not mean there was a change in its monetary policy stance and that it would maintain very accommodative monetary conditions.

Below are key quotes from Shirakawa's speech at a seminar and a question-and-answer session that followed.

DEFLATION

"The degree of price falls is likely to continue narrowing in fiscal 2010/11 and beyond as the supply-demand balance improves in line with the pick-up in the economy. But downward pressure on prices will remain for quite a long time because the lack of demand is unprecedentedly big and the pace of recovery in the economy will be slow ...

"The BOJ sees little chance of price falls exerting pressure on the overall economy, as Japan's financial system is stable while consumer prices as of September are only matching levels of August 2007 just before oil products started their surge, and price expectations at households and companies are stable."

MONETARY POLICY

"The BOJ will maintain very easy monetary conditions and support the return of Japan's economy to a sustainable growth path with price stability ...

"We've decided to end our commercial paper and corporate bond purchases, which were implemented as temporary steps to cope with a sharp credit crunch triggered by the collapse of Lehman Brothers.

"This is a separate issue from how to deal with, through monetary policy, balance sheet adjustments and an ensuing weakness in economic recovery.

"In autumn last year, the two (emergency steps and traditional monetary policy) were closely related. But with the shock from the financial crisis now having disappeared, our traditional monetary policy stance remains unchanged ...

"Generally speaking, it is important to look at the economy from the viewpoint of prices. But it is also important to take into consideration financial imbalances such as rises in asset prices and leverage.

"Central banks, not just the BOJ, have faced gaps between their price forecasts and actual price moves, and it will likely take several years for these gaps to disappear. It is a common problem for countries. In other words, the financial shock that hit the globe was so big that it will take time for each economy to return to normal.

"The BOJ will therefore stick to its current rate policies, while it recognises that doing so may become a cause of another imbalance."

JAPAN ECONOMY