BOJ Shirakawa economy likely to become more severe

TOKYO - Bank of Japan Governor Masaaki Shirakawa said the Japanese economy is deteriorating and economic conditions are likely to become more severe.

He also said the U.S. recession is likely to become the longest U.S. recession since the World War Two and that there is great uncertainty because much of the world economy is in bad shape.

The Bank of Japan cut its policy target rate to 0.10 percent from 0.30 percent last week. It also increased its outright purchases of Japanese government bonds and decided to temporarily buy commercial paper outright.

Following are key comments from Shirakawa's speech to business leaders.

JAPANESE ECONOMY

"Corporate earnings and corporate fund-raising conditions are worsening while employment and income conditions are also becoming severe. Thus domestic private demand is likely to weaken further. Exports are likely to fall sharply due to the slowdown in the world economy and the yen's rise."

"In short, the Japanese economy is deteriorating and for the time being its conditions are likely to become more severe.

Depending on the developments in the Western financial crisis, the world economy and financial conditions in the Japanese economy, there's further downside risk."

MONETARY POLICY

"With interest rates so low, from now on, the meaningful policy issue will be how to deal with the availability and costs of corporate fund raising, namely how easy it is for companies to raise funds."

"In that sense, it is important to maintain stability in financial markets so that the effect of easing will be fully felt."

"Economic conditions are becoming severe rapidly, raising the risk that the effect of low interest rates may not spread to the real economy. With this recognition, the BOJ has taken various measures to reduce such risks."

"The world economy is in a very severe condition - one that it has not experienced for a long time, I'd even say, a crisis. For the moment, extinguishing the fire from the crisis is our priority for now and we are doing all we can."

"But looking back at the past 20 years, the creation of bubbles and their bursting has become more frequent and widespread.

Part of the reason behind that has been excessive policy steps to deal with an imminent crisis that led to a bigger crisis. That's what we have to bear in mind too."

U.S. ECONOMY

"The general view is that the U.S. economy will recover in the latter half of next year. But the reasoning for that timing does not have any strong basis, which may indicate that current severe conditions will persist for some time."

"In any case, the U.S. recession is likely to last longer than 16 months, which the U.S. experienced in 1973-1975 and 1981-1982, meaning this one will likely be the longest since World War Two."

"The Japanese economy returned to recovery after three excesses -- in plant and equipment, in employment and in debt -- were cleared.

"If we apply this to today's United States, important points to look at would be how housing market adjustments will proceed and how much banks will write off losses and recapitalise.

"In Japan's case, robust growth in the world economy was a big help. This time there's a great amount of uncertainty over the world economy, which make things difficult."

WORLD ECONOMY

"In Europe, the economy is worsening, making banks lending attitude more stringent, putting more pressure on the real economy."

"The slowdown is becoming evident in emerging economies that had been relatively strong until recently."

"A feature of the current slowdown is the speed and synchronicity. At present, not only the developed countries, such as the United States, Europe and Japan but also emerging economies are either in recession or slowdown. This has never happened since former Socialist countries joined the market economy."