UPDATE 1-Japan Hayashi: need easy policy due to deflation risk

* Outgoing econ min warns on deflation, monetary policy

* Says govt must scale back steps taken in response to crisis

TOKYO, Sept 1 - Japan may need to maintain an accommodative monetary policy for some time as the country could well fall into deflation, Economics Minister Yoshimasa Hayashi on Tuesday.

"The risks of deflation are quite high," Hayashi said. "It will be necessary to carefully examine monetary policy while considering mid- to long-term price trends."

The government must also scale back extraordinary measures enacted in response to the global economic crisis as part of an exit strategy, Hayashi told reporters after a cabinet meeting.

Hayashi said he hopes Japan's new government will consider these points as it manages the economy.

In a historic election on Sunday voters handed control of the government to the Democratic Party of Japan, ending five decades of almost unbroken rule by the Liberal Democratic Party.

The Democrats will come to power at a tough time for the economy, which returned to growth in the second quarter, pulling out of its longest postwar recession.

The nascent recovery was due to short-term stimulus efforts, and economists think further growth is expected to be moderate as companies are still saddled with low capacity utilisation.

In addition, Japanese core consumer prices tumbled 2.2 percent in July, the fastest annual pace on record, data showed last week.

The Bank of Japan is already forecasting two years of deflation and is likely to extend that to three when it issues its twice-yearly outlook report in October.

Still, BOJ Governor Masaaki Shirakawa said on Monday the risk of a deflationary spiral, in which expectations of price declines prompt consumers to hold off from spending, was not rising, as companies' and consumers' price expectations were holding steady and the banking system was stable.

The central bank, with its key policy rate near zero percent, last month extended by three months the September deadline for its unconventional measures aimed at easing corporate funding strains. The focus now is on when the central bank will exit from those emergency measures.

The outgoing LDP government had planned 27 trillion yen ($287 billion) in stimulus spending since the global financial crisis erupted last year. But the Democrats have said that the government is spending money on the wrong things and that it would cut wasteful spending from an extra budget for the year to next March.

Stimulus efforts from past economic woes have left a public debt equivalent to 170 percent of GDP, the highest among advanced nations, worrying financial markets about further debt issuance.