UPDATE 1-BOJ, govt at odds on inflation targeting

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

* Calls grow for strong response to deflation

* BOJ has eased monetary policy in response to govt pressure
(Adds quote from Shirakawa, details)

By Stanley White

TOKYO, April 20 (BestGrowthStock) – The Bank of Japan said on Tuesday
inflation targeting does not work, setting the central bank on
course for a clash with the finance minister, who is becoming
open to ruling party lawmakers’ calls for a binding price target.

The Democratic Party-led government has influenced BOJ
monetary policy before by publicly pressuring the central bank
for a sterner response to persistent deflation. Should Finance
Minister Naoto Kan warm further to inflation targeting, that
could lead to further monetary easing.

Democrat lawmakers are pushing the government to show it will
take drastic steps to boost economic growth as public support for
Prime Minister Yukio Hatoyama’s cabinet crumbles before an
election expected in July for parliament’s upper house.

Japan’s outstanding debts are almost twice the size of its
economy, making it the most indebted among industrialised
nations. This leaves little room to increase fiscal spending and
makes it more likely the government will lean on the BOJ to
support economic growth.

“We’re at a stage where some are having second thoughts about
inflation targeting,” BOJ Governor Masaaki Shirakawa said in the
lower house financial affairs committee.

“When the global economy was growing well in the 2000s,
people focused too much on short-term prices. This led to an
excessively long period of low rates, which created excess credit
and led to increased leverage. When this was unwound, it had a
big economic impact.”

BOJ board members’ understanding of long-term price stability
centre on a 1 percent rise in consumer prices. That is better
than an inflation target, because the bank is not easily swayed
by short-term price fluctuations, Shirakawa said.

Finance Minister Naoto Kan, speaking to reporters after a
cabinet meeting, said it was worth listening to a proposal from
within his own party to adopt an inflation target.

A leading member of a panel of 130 ruling party lawmakers
said last week the BOJ should ditch its self-imposed cap on
government debt buying to reflate the economy and target 2
percent inflation in around two years. [ID:nTOE63F06Q]

The panel is trying to persuade the party to adopt its
anti-deflation proposals on economic policy in its campaign
platform for the election expected in July.

In response to deflation, the BOJ has kept its benchmark rate
at 0.1 percent and last month doubled the size of low-interest
funds it offers to banks in three-month loans, which bring down
money market rates.
(Editing by Michael Watson)

UPDATE 1-BOJ, govt at odds on inflation targeting