UPDATE 2-BOJ's Nishimura: risks to Japan economy remain high

* Must keep monetary easing to help sustained econ recovery

* Ending crisis steps different from exiting easy policy

* Should review fund steps in accordance with market recovery

KOBE, Japan, Oct 21 - Bank of Japan Deputy Governor Kiyohiko Nishimura on Wednesday warned that the downside risks facing the country's economy remained high, reiterating the need for the bank to maintain easy monetary conditions.

Nishimura also said it would take considerable time for price growth to return to desirable levels, not only in Japan but also in other major economies, reiterating the need to prevent deflation from hurting Japan's already fragile economy.

"Our main scenario is for Japan's economy to continue picking up moderately as a trend. But uncertainty over the outlook remains high. The biggest risk lies in developments in overseas economies," Nishimura said in a speech to business leaders in Kobe, western Japan.

On measures to support corporate funding, Nishimura repeated the BOJ's line that the bank would decide on whether to extend them beyond December at its next policy meeting on Oct. 30 or later.

"They should be reviewed in accordence with the degree to which markets have recovered, and to which nervousness among market players have retreated," he said.

The BOJ deferred a decision last week on withdrawing support for corporate finance in the face of pressure from some cabinet ministers who worry that a quick exit from emergency steps to support corporate funding would hurt the fragile economy, just emerging from its deepest recession in 60 years. "(The BOJ's) CP and corporate bond buying have fulfilled a certain role as excessive anxiety among market players has receded," Nishimura said.

"Corporate financial support measures have helped a recovery in market functions which had lowered rapidly," he said.

Nishimura is the first board member, aside from Governor Masaaki Shirakawa, to speak since the policy review last week.

He has mostly toed the BOJ line on policy and voted for its interest rate cuts and corporate fund support measures to ease credit strains in the wake of the financial crisis a year ago.

"Commercial paper and corporate bond purchases were introduced when money and credit markets were dysfunctional. With those markets now behaving more normally, it would make sense for these programmes to be wound down," said Shane Oliver, chief economist and head of investment strategy at AMP Capital Investors in Sydney.

"The BOJ won't be raising rates for the next 18 months at least... There have been some signs of recovery but deflationary pressures remain pretty intense and domestic demand remains weak."

The BOJ will issue its twice-yearly outlook report on Oct. 30, which forms the basis for its monetary policy decisions, and is expected to forecast three years of deflation to March 2012.