Highlights 2-BOJ's Shirakawa says Japan not in stagflation

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

TOKYO, July 15 (Reuters) - Bank of Japan Governor Masaaki Shirakawa said on Tuesday he does not think Japan has entered stagflation.

He also said Japanese financial markets remain relatively stable even after U.S. financial markets were hit by renewed concerns over the health of U.S. lenders.

Following are highlights of his comments at a news conference.

MONETARY POLICY

"We need to bear in mind that there is a considerably long time lag before the effect of monetary policy appears (in the economy). There are various views about the length of the lag but it is said to be about one-and-a-half to two years.

"Therefore, we determine current interest rate levels with an eye on the outlook for the economy and prices one-and-a-half to two years ahead.

"The economy is slowing further and will continue to do so for a while, but will then gradually return to a moderate growth path. Prices are rising but the pace of increase will likely slow after a while. Based on this assumption, there is no need to adjust rates at the moment.

"That said, the economy and prices are faced with risks in different directions. We will take this into account and conduct policy by examining at each policy meeting whether there is any change to our scenario."

JAPANESE ECONOMY

"Business sentiment is becoming more cautious, as seen in the tankan survey. Many of the BOJ's regional branch managers who gathered (for a meeting last week) said growth was slowing further.

"The possibility of the economy remaining on a sustainable growth path with price stability is relatively high. In that sense, I don't think Japan has entered a phase of stagflation.

"Having said that, there is high uncertainty over such an outlook. We are in a stage where we need to carefully watch both downside risks to the economy and upside risks to prices."

"The biggest factor behind the current slowdown is a further deterioration in terms of trade. Corporate earnings have been suppressed, which affects capital spending. Although capital spending of big manufacturers has remained firm, that of small firms and non-manufacturers is more clearly slowing.

"Consumption is also sluggish, hit by both tame wage growth and worsening terms of trade."

"Production is in a declining trend, although the margin of fall is not that big."