BOJ's Shirakawa says deep adjustment unlikely

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OSAKA, Japan, Aug 25 (Reuters) - Bank of Japan Governor Masaaki Shirakawa said on Monday the nation's economic growth will likely remain sluggish on high energy costs and slowing export growth, but a deep adjustment is unlikely.

The central bank kept interest rates on hold at 0.50 percent in a widely expected move at a policy meeting last week.

Following are key comments by Shirakawa during his meeting with business executives in Osaka, western Japan:

JAPAN ECONOMY

"Japan's growth will likely remain sluggish for the time being against the backdrop of high energy and materials prices and weaker growth in exports due to a slowdown in overseas economies.

"However, Japan's economy is unlikely to experience a deep adjustment phase."

"Japan's financial conditions have been accommodative.

"Although it is a cause for concern that financing conditions of firms in construction and real estate industries and small firms in general are becoming increasingly severe, financial conditions taken as whole have been accommodative.

"Regarding the outlook for prices, it is unlikely that the second-round effects will intensify in the near term, judging from the current level of the domestic output gap, inflation expectations of households, and firms' price-setting behaviour."

GLOBAL ECONOMY

"With regard to the U.S. economy, it is unforeseeable when and how the negative feedback loop between financial markets, asset prices and economic activity will diminish.

"In Europe, economic growth is slowing further. In Asia, although the Chinese and Indian economices continue to post high growth, some of the NIEs and ASEAN economies are showing deceleration in exports and signs to slowing domestic demand.

"Developments in the global economy as a whole are therefore likely to remain highly uncertain for the time being."

MONETARY POLICY

"Japan's economy is unlikely to experience a deep adjustment phase.

"As a result of firms' restructuring efforts ... the 'three excesses' -- namely in production capacity, employment and debt -- have been eliminated, and Japan's economy has become more resilient to shocks ...

"The short-term real interest rate calculated by subtracting the CPI inflation rate from the call rate has been negative, as the policy interest rate has been at a low level of 0.5 percent ...

"It is reasonable to expect, as the main scenario, that Japan's economy will return gradually to a moderate growth path as commodity prices level out and overseas economies move out of their deceleration phase ...

"Global financial markets are likely to remain unstable for the time being, and there are downside risks to the world economy.

"There is a risk that domestic demand may weaken as a result of the outflow of income due to the high energy and materials prices. The Bank is attentive to the downside risks to economic growth.

"The current situation requires the bank to carefully monitor both downside risks to economic growth and upside risks to inflation. Furthermore, if the downside risks to the economy turn out to decrease, there is a risk that prolonging the period of accommodative financial conditions will lead to swings in economic activity and prices."

BUBBLE

"Similar to cases when bubbles emerge, the current U.S. subprime mortgage problem keenly illustrates that it is difficult to recognise the bursting of a bubble as it happens. Central banks should therefore pay due attention, in their conduct of monetary policy, to the negative effects that may arise from prolonged accommodative financial conditions" (Reporting by Tokyo Policy Desk)