* No preset idea on if to extend fund support measures again
* Japan unlikely to slip into deflationary spiral
* Sees no need for further monetary easing (Adds news conference quotes, paragraph 3)
By Leika Kihara
HAKODATE, Japan, July 22 (Reuters) - Bank of Japan Deputy Governor Hirohide Yamaguchi hinted he may favour extending the central bank's unconventional measures aimed at easing credit strains beyond December, saying on Wednesday that it was unclear if corporate funding conditions would keep improving.
Yamaguchi emphasised that the central bank would focus on downside risks to the economy. But he reiterated that the country was unlikely to enter a deflationary spiral and brushed aside the idea that persistent price falls could warrant further BOJ easing in the long run.
"Looking at the trend, the economy is expected to head towards what the BOJ sees as price stability. As such, I don't see the need to take further policy action," he told reporters after meeting business leaders in Hakodate in the northernmost prefecture of Hokkaido.
While Yamaguchi said he had no fixed view on whether the BOJ would extend beyond December its corporate funding support measures, analysts said his cautious view on funding conditions suggested it could be some time before it exits these measures. "Corporate finance has stopped deteriorating, and spreads are coming in gradually," said Satoru Ogasawara, an economist at Credit Suisse in Tokyo.
"But Yamaguchi is cautious about the future. If finance conditions remain tight, I think they will extend the corporate finance measures again."
Yamaguchi said in a speech earlier that banks, faced with a harsh earnings outlook, may become more cautious about lending, meaning improvements in corporate funding may not spread.
"With regard to future developments in corporate financing, there is uncertainty about whether these signs of improvement will become widespread," Yamaguchi said.
Japan's top three banks lost a combined 1.2 trillion yen ($13 billion) in the year that ended in March, hit by bad loan costs and a sharp fall in the value of their huge stock portfolios. They are forecasting only modest recoveries this year.
The U.S. Federal Reserve and other central banks have slashed interest rates to record lows and taken a slew of other steps to spur economic growth, but the focus is now turning to when and how they will go about exiting these measures.
The BOJ last week voted to extend the measures it has taken to deal with a crunch in credit markets, such as buying commercial paper and corporate bonds from banks, on the view that corporate finance remained severe despite some improvements.
But the three-month extension was shorter than the six months some had expected, and BOJ Governor Masaaki Shirakawa signalled that the measures could be scaled back or scrapped if financial conditions kept improving.
Indeed, credit markets have shown signs of life.
Issuance of corporate bonds surged to a record 2.29 trillion yen in June, according to Reuters data, after freezing up late last year in the wake of the collapse of Lehman Brothers. Corporate bond issuance averaged less than 500 billion yen a month from 2002 to 2007, when the economy was expanding.
The three-month TIBOR rate has dropped more than 30 basis points to about 0.55 percent from 0.90 percent late last year.
NO DEFLATIONARY SPIRAL
Yamaguchi, a career central banker who has mostly toed the BOJ's official line, repeated the BOJ's view that despite recent falls in consumer prices, Japan was unlikely to sink into a deflationary spiral, in which weakness in the economy and falling prices feed into each other.
"When the economy encounters such a big shock, large short-term swings in inflation are unavoidable. In such conditions, we think it's most important that we avoid price falls turning into a deflationary spiral."
Japanese consumer prices fell a record 1.1 percent in the year to May, with growing signs of falling demand pushing the economy deep into its second spell of deflation this decade.
The BOJ is forecasting two years of deflation and has said repeatedly that several months of consumer price falls won't warrant any immediate policy response.
Some analysts, however, say the central bank should do more.
"The BOJ has been late in realising the depth of the problems and hasn't responded aggressively enough," said Dariusz Kowalczyk, chief investment strategist at SJS Markets Ltd in Hong Kong.
"Deflation is a problem, and the BOJ should focus on what the Federal Reserve is focusing on, which is stimulating a recovery in real demand. The BOJ should also extend corporate funding measures again." (Additional reporting by Stanley White; Editing by Hugh Lawson)