* BOJ to buy corporate bonds to ease financing strains
* BOJ keeps rates on hold, warns of 2 years of deflation
* Japan Dec exports plunge 35 pct vs yr ago in record slide
By Yuzo Saeki and Hideyuki Sano
TOKYO, Jan 22 (Reuters) - The Bank of Japan said on Thursday it would buy corporate bonds to ease a severe funding squeeze that threatens to deepen a recession, and forecast the world's No.2 economy to slide back into deflation for two years.
The BOJ left interest rates on hold at 0.1 percent but warned the economy was worsening sharply, as new figures showed exports plunging at a record pace while the yen hits 13-year highs.
The central bank delivered a similarly bleak warning about deteriorating access to credit, saying it would take on new credit risks to try to limit the economic damage from the global financial crunch that has dried up corporate financing.
"Shirakawa frankly seemed quite worried about the uncertainty over the economic outlook," said Hideo Kumano, chief economist at Dai-Ichi Life Research Institute.
"His stance appears to be that if there are any more steps that are deemed effective, the Bank of Japan will implement them without preconception."
The Bank of Japan's moves are the latest by Japanese policy makers scrambling to shield the economy from the global financial storm that has pushed the economy into a deep recession.
Like the U.S. Federal Reserve, the central bank's interest rates have been cut close to zero and it has offered various measures debt measures to get cash into the financial system to revive lending.
On Thursday, the BOJ said it would buy corporate bonds and accept real estate investment trust (REIT) debt as collateral, on top of previous plans to buy commercial paper, as it expands the credit risks it is willing to stomach to help firms raise cash in the face of gummed up financial markets.
"Commercial paper is the last resort for (companies) to raise funds, and the functioning of that market has deteriorated," BOJ Governor Masaaki Shirakawa told reporters. "So now we are trying to help the market, and I think that means a lot."
The bleak economic outlook boosted short-term Japanese government bond futures, while the REIT move boosted property shares and helped the Nikkei share average climb 1.9 percent.
"The fact that the BOJ is going to take on credit risk is significant. It is a serious announcement," said Jun Miyata, a senior fund manager at T&D Asset Management Co, adding that the central bank should buy a wider range of bonds.
Still, the BOJ's efforts would not provide much support for smaller firms worst hit by the recession and in greatest need of funds, said Yasuhide Yajima, an analyst at NLI Research Institute.
"Looking at the way exports are falling, the economy is worsening on an unprecedented scale. It's true many of the steps the BOJ is taking are unconventional, but they are simply not enough," he said.
Yen interbank rates -- key reference rates for credit markets -- have inched down, but only slowly in an economy where distrust of longer-term lending runs high.
Three-month yen TIBOR was at 0.72 percent on Thursday, having come off peaks of 0.91 a month ago but still significantly higher than overnight cash rates near 0.1 percent.
DEFLATION COMING BACK
The BOJ warned Japan faced its second bout of deflation this decade. It forecast core consumer prices would fall 1.1 percent in the year to March 2010 and 0.4 percent the following year, although Shirakawa himself carefully avoided saying the word deflation.
It is the first time the BOJ has forecast a return to broad-based price declines, which can be debilitating for an economy because consumers hold back purchases to wait for yet lower prices.
For a graphic of the forecasts, click:
https://customers.reuters.com/d/graphics/BOJ_ECFCST0109.gif
The central bank said it saw the economy turning up by early next year but warned that uncertainty was high, and analysts said this was pretty optimistic.
Exports, a key driver of Japanese growth in the past, show no sign of recovery. They plunged in December a record 35 percent from a year earlier as Asian consumers buckled under the global financial crisis and the U.S. recession crushed demand for electronics and autos.
The collapse in exports pushed Japan deeper into recession in the fourth quarter, analysts said, and with the global economy crumbling and the yen at 13-year highs against the dollar, there was no light at the end of the tunnel.
The central bank was similarly grim in its outlook.
"Exports are falling sharply on slowing overseas economic growth. Domestic demand is also weakening as corporate revenues as well as household's job and income environment worsens," the BOJ said in a statement.
"Japan's economy is worsening sharply and is expected to continue worsening in the near term."
Underlining the collapse in exports, electronics maker Sony Corp said on Thursday it faced a $2.9 billion operating loss this financial year, with the yen strength adding to woes from sliding demand.
Rising risk aversion and fears about the stability of the U.S. and European banking-sectors pushed the yen to a 13-year high of 87.1 per dollar on Wednesday.
Finance Minister Shoichi Nakagawa fired a shot across the bows of currency markets, saying rapid moves in the yen were not good, but analysts played down the risk of intervention.
With exports collapsing and the yen surging, the mood among Japanese manufacturers' hit a new low, the Reuters Tankan survey showed. (Additional reporting by Tetsushi Kajimoto and Leika Kihara in Tokyo, Vidya Ranganathan in Singapore; Writing by Rodney Joyce; Editing by Hugh Lawson)