TOKYO, Jul. 6, 2009 (Kyodo News International) --
(Editors: ADDING 8TH-10TH GRAFS)

Bank of Japan Governor Masaaki Shirakawa said Monday Japan's financial system has become calmer but that corporate financing conditions remain severe while financial institutions still need to be closely monitored considering their losses in fiscal 2008.

''Our country's financial system is calming down on the whole on the back of easing tension in financial and capital markets at home and abroad,'' Shirakawa said at the opening of the central bank's branch managers' meeting, referring to improving the environment for businesses to issue commercial paper and corporate bonds.

But corporate financing conditions remain ''severe,'' he cautioned. ''Since financial institutions largely fell into the red in fiscal 2008 and differences in their management power are widening, financial institutions' management conditions still need to be monitored.''

As for the domestic economy, he reiterated that it has begun to stop worsening, adding that the central bank expects the economy to gradually show clearer signs of leveling out.

''Japan's economic conditions, after deteriorating significantly, have begun to stop worsening,'' Shirakawa said, repeating the same expression he used in describing the nation's economic situation in mid-June.

However, he cautioned that consumer spending is highly likely to ''continue to weaken'' as harsh corporate earnings hurt employment and income conditions. But he added that exports and production are likely to ''continue to pick up'' largely owing to progress in inventory adjustment at home and abroad.

So overall, ''the possibility is high that our country's economy will show clearer signs of stopping falling'' over time, the governor said.

As for price trends, Shirakawa said Japan's consumer price index excluding volatile fresh food prices is likely to fall further as oil prices decline from the previous year's high-flying levels while demand weakens amid the recession.

Japan's key CPI fell a record 1.1 percent in May from a year earlier.

The BOJ is scheduled to issue a report on Japan's regional economies later in the day after the one-day meeting with heads and senior officials of its 32 domestic branches and overseas offices.

In the BOJ's previous report on regional economies in April, the bank downgraded its assessments for seven of the nation's nine regional economies due to slowing consumption and a sharp drop in capital investment.