UPDATE 3-BOJ Shirakawa: Japan corporate finance still tight

By Tetsushi Kajimoto TOKYO, July 6 (Reuters) - Bank of Japan Governor Masaaki Shirakawa said many firms still face tough funding and bank lending conditions, reinforcing the view that the BOJ may extend its corporate finance support measures beyond September. Markets are focusing on whether the BOJ will let these extraordinary measures expire as scheduled in September, and central bankers around the world will probably monitor the debate as they consider ways to retract their own response to the financial crisis. With many Japanese banks having fallen into the red in the year that ended in March and showing increasingly varying levels of strength, Shirakawa said financial institutions needed close monitoring although the financial system was getting calmer. "CP and corporate bond issuance conditions are improving further, and bank lending mainly towards big firms has been rising at high levels," Shirakawa said on Monday in a speech to a meeting of the central bank's regional branch managers. "Many firms still face a tight funding and lending attitude from banks, although there are signs that the trend has stopped deteriorating," he said. Japanese business sentiment has improved less than expected in the last few months, the BOJ's tankan survey showed last week, but the corporate finance market appears to be on the mend after seizing up in the wake of the collapse of U.S. investment bank Lehman Brothers in September. "Shirakawa hardly suggested he was confident about improvements in corporate finance. Basically, the BOJ is likely to prolong its corporate financial support even if it tweaks some operations," said Naomi Hasegawa, a senior fixed-income strategist at Mitsubishi UFJ Securities. Hasegawa said economic activity is at low levels and corporate profits are bleak, as the tankan showed, so there is little reason for the BOJ to take a step that could be seen as monetary tightening given the huge amount of slack in the economy and the risk of Japan falling deeper into deflation. In a sign Japan's second bout of deflation in less than two years is deepening, core consumer prices fell a record 1.1 percent in the year to May.

Wholesale price data on Friday are also expected to show a record drop in June from a year earlier. Adding to the fear of deflation and illustrating weakness in final demand, the government estimates that supply now exceeds demand by 45 trillion yen ($471 billion) a year. ECONOMY STOPPED WORSENING Shirakawa reiterated that the Japanese economy has begun to stop worsening and is likely to show clearer evidence of levelling out as exports and industrial output continue to recover and public investment keeps increasing. The BOJ raised its assessment in its quarterly regional economic report issued at the branch managers' meeting, saying conditions remained severe but had recently begun to stop worsening with the pace of deterioration slowing. It was the first overall upgrade in the quarterly report since October 2006, with all of the nation's regions saying their economic conditions had improved from three months ago. But Hideo Hayakawa, an executive director who heads the BOJ's branch office in the western city of Osaka, home to many electronics manufacturers, said it was highly unclear how the rebound in exports and production would hold up after summer. "China's stimulus measures have had an impact on shipments of audio-visual and household appliances, but U.S. and European markets are lacking momentum," Hayakawa told a news conference. "So there is some doubt about how long a recovery in final demand will continue." The BOJ upgraded its economic assessment for the second straight month in June, as improvements in exports and output fuel hopes that the worst of the recession is over. It has kept interest rates at 0.1 percent since cutting them twice last year in the wake of the global financial crisis. The central bank's policy board next meets on July 14-15. Reflecting increases in industrial output, Japan's index of coincident economic indicators rose 0.9 point in May to a preliminary 86.9, marking the second consecutive monthly gain, the government said on Monday. The Cabinet Office left unchanged its assessment that the economy is worsening but there are signs of it bottoming out. Japan's three largest banks lost a total of 1.2 trillion yen in the year that ended in March. (Additional reporting by Stanley White; Editing by Hugh Lawson) (([e-mail]; [phone]; Reuters Messaging: [e-mail])) Keywords: JAPAN ECONOMY/ (If you have a query or comment on this story, send an email to [e-mail]) COPYRIGHT Copyright Thomson Reuters 2009. All rights reserved.

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