UPDATE 2-BOJ Mizuno warns of fragile global growth, exports

By Leika Kihara

OKAYAMA, Japan, Aug 20 (Reuters) - Bank of Japan board member Atsushi Mizuno warned the country's export recovery may slow from autumn as global growth remained fragile, suggesting he may favour keeping the bank's unconventional policy steps in place beyond December.

He also said weak overseas growth may keep firms from increasing capital investment and pose a risk to the central bank's forecast for a moderate recovery late this year, offering the bleakest assessment to date on the economic outlook.

'Global financial and economic conditions remain fragile and can't achieve a sustained recovery without support from governments and central banks,' Mizuno said in a speech to business executives in Okayama, western Japan, on Thursday.

'Not only major economies but emerging countries are supported by central banks' ample liquidity provision and government stimulus measures.'

His remarks come amid growing market doubts over the sustainability of the global recovery, with a sharp slide in Chinese equities weighing on stock markets around the globe.

'He's almost saying the economic outlook is already undershooting forecasts rather than saying there is a risk of it undershooting. He might be the most pessimistic on the board,' said Mari Iwashita, chief market economist at Daiwa Securities SMBC.

'Judging from his economic assessment, there seems to be quite a distance before the exit from unconventional steps.'

Central banks around the world have begun debating how and when to phase out their emergency steps to contain the damage wrought by the worst global financial crisis in decades, but most are not expected to do so until well into next year.

Japanese exports and output have bounced back from a steep fall triggered by the global crisis, helping the economy return to growth in the second quarter.

But analysts warn of a rocky road ahead as the nascent recovery was largely due to the temporary effects of government stimulus measures taken around the globe.

The BOJ has kept interest rates near zero and last month voted unanimously to extend measures aimed at easing corporate credit strains, such as buying commercial paper and corporate bonds from banks, beyond their September deadline.

But the three-month extension was shorter than the six months some had expected, reflecting improvements in credit markets.

The three-month TIBOR rate has dropped more than 30 basis points to about 0.54 percent from 0.90 percent late last year . The yield on three-month government treasury bills has dropped to around 0.14 percent from about 0.30 percent earlier this year.

Still, many analysts expect the BOJ to extend its special measures again beyond their current December expiry date due to the weakness in the economy.



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In its next twice-yearly economic outlook report due in October, the BOJ will examine whether to maintain its current long-term forecast that Japan's economy will achieve a moderate recovery late this year to early next year.

Mizuno said it was indispensable for central banks to consider an exit strategy for their unconventional policy steps to achieve sustainable long-term growth in their economies.

But he said Japan's corporate financing conditions remained severe and that the BOJ's fund-support measures were helping keep short-term interest rates down, suggesting he would favour extending the measures beyond December.

Mizuno also said it was important to distinguish between the exit from unconventional steps put in place temporarily to cope with the credit crisis, and the exit from very low interest rates.

'If there was an increasing possibility of the economic and price outlook undershooting forecasts, one option for a central bank would be to announce its commitment to maintaining very low interest rates,' he said.

A former bond strategist, Mizuno voted against the BOJ's decision to cut interest rates last October, arguing that such a move would do little to boost the economy.

But he then supported the BOJ's subsequent rate cut in December and also called for unconventional policy steps in February this year to prevent the economy from worsening further.

Mizuno's five-year term on the board expires in December.

(Editing by Hugh Lawson)

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