OSAKA (AFX-ASIA) - Bank of Japan governor Masaru Hayami said there is still room to see a decline in mid-term interest rates, though long- and short-term rates will not fall further. "I think there is more room to see a drop in mid-term interest rates, such as term vehicles used among banks" with maturity of two or three years or shorter, Hayami told a business forum here. "However, long-term interest rates, as well as short-term rates, will no longer fall below current levels," he said, adding: "It would be wrong if the BoJ ignored deflation." He added: "Stimulating demand will work fine for prices and the economy. However, we cannot rely only on rising government spending, as deregulation and changes in the structure of fiscal spending will be needed to stimulate demand." "The Japanese economy still has lots of potential to grow further, and the government should improve the climate in which consumers can use their assets, worth nearly 1,400 trln yen, to contribute to rejuvenating the sluggish economy." "Japanese banks' outstanding loans are steadily increasing, despite efforts to write them down, because new bad loans are being generated." "Although the BoJ is injecting massive levels of liquidity into the money market, it will not reach individual financial institutions and real economic activity."