INTERVIEW-Ex-BOJ dep gov: more JGB buying would help economy

* Ex-BOJ deputy gov Iwata: Japan economy to recover in H2

* Iwata says govt needs to prevent jump in jobless rate

TOKYO, April 8 - The Bank of Japan could help prop up the faltering economy by increasing the amount of Japanese government bonds it buys, a former deputy governor of the central bank said on Wednesday.

"The BOJ recently decided to increase the amount of JGB buying and this is one option (it could pursue again)," Kazumasa Iwata told Reuters in an interview, emphasising that it was up to the central bank to decided on monetary policy.

Prime Minister Taro Aso has instructed government and ruling party officials to compile a "bold" economic stimulus plan with spending of around $100 billion and said the measures would be partly funded by new government bond issues.

Iwata, now the head of the Cabinet Office's Economic and Social Research Institute, said the impact of the measures on the economy will likely show by autumn, provided an extra budget and related bills are approved by parliament in May or June.

He said the Japanese economy is likely to bottom out in the second half of this year, although the pace of recovery is unlikely to pick up soon.

"Companies' views that jobs and facilities have become excessive are considerably strong. Therefore it is difficult to foresee a sharp rebound immediately.

"What I'm afraid of is that without any sort of government steps the gap between supply and demand as measured by gross domestic product could widen to 10 percent of GDP from the current 4 percent."

But he said it would be impossible to offset the demand shortfall solely with government spending.

"What the government must strive for is to prevent the unemployment rate rising over the past peak (of 5.5 percent marked in 2002 and 2003)," he said, pointing to negative social implications of job losses.

Iwata, who was seen as a policy dove when serving on the central bank's policy board until March last year, said global responses to the economic crisis in terms of fiscal and monetary policy have been quick.

"Looking at policy responses of the central banks in leading nations, they have moved towards both credit easing, which involves buying assets with higher risks including corporate bonds, as well as quantitative easing, as purchases of government bonds can be defined as such," Iwata said.

The BOJ said on March 18 it would increase its purchases of JGBs from banks by nearly a third to 21.6 trillion yen a year, aiming to provide ample cash in the economy to help cushion the effects of a severe recession.

Iwata is a member of the Council on Economic and Fiscal Policy, the government's top economic advisory panel, which urged the government on Tuesday to spend around 10 trillion yen ($100 billion) on new stimulus measures.

The economic package, details of which are expected later on Wednesday, will add to 12 trillion yen ($120 billion) in spending planned under already announced stimulus measures since last August.

Heightened fears of an economic free-fall after the nation's GDP for October-December tumbled at a pace unseen in 35 years and expectations for a similar drop in the first quarter of this year prompted ruling parties to seek additional steps.

The world's No.2 economy has been more severely hit by the global recession than other major economies due to its heavy dependence on exports, which have nearly halved in recent months from the year-earlier figures. ($1=100.17 Yen)