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MATSUYAMA, Japan, Nov 13 (Reuters) - Bank of Japan policy board member Seiji Nakamura said on Thursday that Japan may be on the brink of a drawn-out adjustment phase as the global financial crisis could slow down the world economy.
Nakamura is thought to have called for an interest rate cut of 0.25 percentage point with two other board members on Oct. 31, when the BOJ cut rates by 0.20 percentage point on the casting vote of Governor Masaaki Shirakawa after the board was split 4-4 on the proposal.
Following is a summary of Nakamura's speech on Thursday:
JAPANESE ECONOMY
"The global financial crisis could slow down the world economy. Japanese economy could be on the brink of a drawn-out adjustment phase. The downside risk to the Japanese economy is rising further."
"After the policy meeting on Oct 6-7, in the United States, we've seen weakness in consumption and output, and marked deterioration in consumer sentiment, on top of a slump in housing markets."
"In Japan, exports and output, which have been leading the economy, were both confirmed as weak in July-September."
"The turmoil in overseas financial markets are starting to affect Japanese markets, which had been relatively stable."
"The yen is appreciating, particularly against the euro, worsening exporters' earnings... Capital market conditions, including commercial paper, have deteriorated as investors are becoming cautious, raising companies' dependence on bank loans"
"At the same time, Japanese banks' lending attitude is turning cautious due to concern over the economy and the earnings outlook, suggesting a change in easy monetary conditions."
"Capital spending is likely to be weak for the time being. But it is unlikely to fall sharply if expectations of mid to long-term growth in global demand will be maintained."
WORLD ECONOMY
"As the latest turmoil in the global financial markets is increasing pressure on the real economy, the risk of further slowdown in the world economy is rising and it's getting hard to predict when it will stop decelerating and accelerate again.
"There's the risk that growth expectations in emerging economies and resource-rich countries, which have been propping up the world economy, will ebb, which could further push down the economy in the Western developed countries."
"The emergence and bursting of the bubble this time was not necessarily caused by the subprime mortgage problem alone.
"The world economy grew steadily from 2002 to 2006 on the back of emerging economies and U.S. consumption while interest rates remained low worldwide thanks to globalisation, providing very accommodative monetary conditions.
"This nurtured expectations for stable growth and firm asset prices to continue, resulting in a massive fund flow to money markets and a huge distortion in the market pricing of assets.
"I understand adjustments are now taking place in the wake of the bursting of the bubble that had created a big gap between the value of assets based on fundamentals, and actual assets and debts.
"This situation is similar to the bubble and ensuing financial crisis that Japan has experienced, and a recovery in the balance sheets (of Western banks) will take a considerable time."
MONETARY POLICY
"We judged that we should pay attention to downside economic risks while maitaining our basic stance that we will conduct policy in line with our assessment of the economic scenario and risk factors."
"We will also ensure stability in financial markets by conducting appropriate market operations."
(Reporting by Tokyo Economic Policy Desk)