HIGHLIGHTS-BOJ's Suda: need for abnormal policies lessening

NAGASAKI, Japan, Sept 9 (Reuters) - Bank of Japan board member Miyako Suda said on Wednesday the role of the bank's unconventional steps aimed at easing credit strains is lessening as corporate financing conditions improve.

Suda, a former economics professor seen as holding hawkish views on monetary policy, made the remark in a speech to business leaders in Nagasaki in southern Japan.

Following are key quotes from her speech:

CORPORATE FINANCE STEPS

'We should not underestimate the drawbacks of the unconventional measures. It is true that these steps have put a cap on rates on commercial paper and corporate bonds and term interest rates, and prompted issuance of corporate bonds mainly from names with high credit ratings. They have made a big contribution to improving market sentiment.

'But there are also side-effects such as a reversal of commercial paper rates between government and companies.

'If this continues it could sap investors' appetite for investment and hinder the function of markets.

'The efficiency and fairness of markets could be compromised by central banks' involvement in resource allocation on the microeconomic level.

'If we keep abnormal steps longer than needed even after corporate finance conditions have improved enough, their side-effect could outweigh any advantages. We should be careful not to let that happen ...

'At present, the bank has no predetermined idea about its next move.

'For the time being, the BOJ needs to maintain a fully accommodative financial environment in order to ensure sustained growth of the Japanese economy under stable price moves, irrespective of whether the BOJ unwinds or extends unconventional policies ...

'As the environment surrounding corporate finance recovers, the role of unconventional policies is becoming less significant.

'But I also understand concerns that unwinding the measures may rekindle worries among companies. Still, the corporate financing climate seems to have improved in such a way as to allow the BOJ to replace unconventional measures with ordinary fund-supply operations.'

PRICES AND MONETARY POLICY

'It is important to consider price stability in the mid- to long-term perspective.

'Monetary policy should not be swayed by short-term falls in prices as long as people's inflation expectations do not fall and there is a high probability that the fall in consumer prices will gradually shrink.

'In the near term, prices are facing downside risks from a deterioration in the demand-supply balance. But what could cause a bigger swing in the economy and prices are expansionary macroeconomic policies that cause excessive investments and market positions.

'In January 2004, more than a year after the economy had hit a bottom, Mr. Bernanke, a Federal Reserve governor at the time, said downside risks to prices were still largely the reason why the bank kept interest rates at 1 percent, a record low at the time.

'It's been said later that such a policy at the time had side-effects ... such as the view that low interest rates at the time were a factor behind the housing bubbles later on.'

'Considering these discussions, it is difficult to aggressively take preventative measures against tail risks.'

ECONOMY

'Japan's economy has stopped worsening and is steadily heading towards a pickup ...

'Looking at economic indicators up until now, the economy is moving largely in line with the bank's standard scenario that it will be recovering moderately from the latter half of the current fiscal year. Downside risks have lowered to a considerable degree in the near term.

'However, uncertainty over the outlook remains strong, such as how long the effects of economic measures will last and how the financial system will develop in the long run. So the situation remains the same, that we need to continue to pay heed to downside risks ...

'Underlying production levels have fallen below the break-even point. I'm not saying production levels need to return to the high level seen in the first half of 2008 to go beyond the break-even point, given that many firms are trying to reduce fixed costs. But it will take time for production to reach the break-even level.

'The situation surrounding capital spending will remain severe for the time being as machinery orders are expected to keep falling in the July-September quarter.'

'Near-term negative risks to the economy appear to have receded substantially, but in the long run, the important point is whether the economy's current pickup supported by stimulus measures will smoothly shift into a sustainable recovery. In this regard, uncertainty is still strong ...

'Downside risks exist for the medium- to long-term growth outlook for companies ... There are possibilities that falls in corporate capital spending will become more prolonged than expected and that personal consumption will fall steeply as a result of job market adjustments ...

'As for prices, we need to be aware of the risk of prices falling more than expected. But in the long run, we also have to remain alert to the risk of inflation, as funds may again flow back into commodities products on the back of easy monetary policies taken globally.'