* Some in BOJ say more corporate funding steps may be needed
* Focus on bank lending, corporate earnings - minutes
By Leika Kihara
TOKYO, May 8 (Reuters) - The Bank of Japan warned that the country's corporate financing environment remained severe, and some of its policy board members saw room for more steps if conditions worsened, minutes of an April board meeting showed.
While funding conditions have improved for big Japanese companies, many small and midsize firms, which employ 70 percent of the nation's workforce, remain strapped for cash with commercial banks hesitant to take on risk.
Bankruptcies and joblessness are on the rise despite the government's $156 billion stimulus package, suggesting that any economic recovery in Japan, in its worst recession since World War Two, could be slow and fragile as the pain from the global financial crisis broadens.
"Board members agreed that while the commercial paper and corporate bond issuance environment has improved, Japan's financial environment remains severe as a whole," minutes of the April 6-7 meeting showed on Friday.
Some on the board said that if corporate financing conditions worsened more than expected, further steps to ease credit strains might be needed, the minutes showed.
The meeting came a week after the March 31 end of Japan's fiscal year, when many companies close their books.
Although the board did not discuss any specific steps, they signalled that the focus would be on whether banks would curb lending as slumping global demand hits corporate earnings.
Easing fears of further financial turmoil have pushed up share prices across the globe including in Japan, with the Nikkei stock average briefly touching a six-month high on Friday.
U.S. regulators told top banks on Thursday to raise $74.6 billion to build a capital cushion officials hope will restore faith in financial firms and set a course out of the deepest recession in decades.
Many BOJ board members said a slew of steps already taken by the central bank, such as its purchases of commercial paper and corporate bonds, were gradually having an effect, with issuance of such paper on the rise, according to the minutes.
At the meeting, the BOJ decided to lend against a wider range of municipal debt in a move to support regional banks, reeling from recession and a domestic credit crunch.
The central bank kept policy unchanged at the following meeting on April 30, when it slashed its economic forecasts but projected a recovery by early next year in a half-yearly outlook report.
Analysts say there is little more the BOJ, which has already nudged interest rates down near zero and is buying a range of corporate debt, could do to ease the pain of the recession.
Japanese bank lending has been on the rise, increasing 3.5 percent in January-March from a year earlier, with more companies relying on banks as weak sales hurt their cash flow.
The balance of commercial paper issued fell 4.3 percent in March from a year earlier, much slower than the 15 percent drop in December last year, suggesting that companies big enough to issue CP are now better off.
But corporate failures are on the rise as smaller firms continue to suffer. Japanese corporate bankruptcies rose 14.1 percent in March from a year earlier, marking the 10th straight month of increase.
Japan's economy shrank 3.2 percent in October-December, the fastest pace since the 1974 oil crisis. It is likely to shrink even more in the first half of this year, economists say, running up a record five quarters of contraction. (Editing by Hugh Lawson)