UPDATE 1-BOJ Shirakawa: Japan corporate finance still tight

(For more stories on the Japanese economy, click [ID:nECONJP])

* Japan financial systems calmer, banks need close monitoring

* CP, corporate bond markets improving but corp finance tight (Adds comments, details)

TOKYO, July 6 (Reuters) - Bank of Japan Governor Masaaki Shirakawa said on Monday that Japan's financial system was on the whole becoming calmer with strains in financial markets both at home and overseas easing, but many firms still faced tight funding conditions and a severe lending attitude by banks.

The Japanese economy has begun to stop worsening and is likely to show clearer evidence of levelling out as exports and industrial output are expected to continue to recover and public investment will keep increasing, Shirakawa said.

Shirakawa's remarks come after the BOJ's tankan corporate survey released last week showed that Japanese business sentiment improved less than expected in June while the corporate finance market, which seized up after the collapse of U.S. investment bank Lehman Brothers in September, was on the mend.

"Looking at Japan's financial conditions, the environment surrounding the issuance of CP and corporate bonds is improving further, and bank lending mainly towards big firms has been rising at high levels," Shirakawa said in a speech to a meeting of the central bank's regional branch managers.

"Many firms still face a tight funding and lending attitude from banks, although there are signs that the trend has stopped deteriorating," he said.

The tankan's financial conditions index for large companies rose 5 points to plus 1, the first improvement in eight quarters, while the gauge of conditions for commercial paper issues gained for the first time in six quarters.