UPDATE 1-BOJ's Nishimura: Negative cycles hard to break

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By Ros Krasny

CHICAGO, May 8 (Reuters) - A vicious cycle between a financial crisis and an economic slump, such as that now at work in the United States, can be notoriously hard to shake, a top Japanese central banker said on Friday.

"Once an adverse feedback loop as been started, it is extremely difficult and costly to stop it and to restore confidence," said Kiyohiko Nishimura, deputy governor of the Bank of Japan.

Speaking at the Chicago Federal Reserve bank structure conference, Nishimura noted the "remarkable" resemblance between the current U.S. crisis and Japan's "lost decade" of the 1990s, when economic growth stagnated for years, though the global nature of the current crisis has made the fallout much worse.

"The damage inflicted on the global financial system and economy has been far more devastating," he said.

An erosion of investor confidence that is part of a negative cycle makes it hard to get a "reasonable pricing" of troubled assets, Nishimura said.

Valuations of assets and the financial institutions that hold them become "significantly underestimated at the trough of an economic downturn," he said.

"At the same time, it becomes increasingly difficult and costly for financial institutions with troubled assets to raise capital," Nishimura added. "Investors tend to wait and see until they are more confident."