UPDATE 2-BOJ’s Nakamura rebuffs govt pressure over deflation

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

* Nakamura: Downside risk still larger than upside risk

* Has no preset idea on future policy

* Reliance on emergency fiscal spending may cause big problems
(Adds more comment, background)

By Rie Ishiguro

FUKUOKA, Japan, Feb 4 (BestGrowthStock) – Bank of Japan policy board
member Seiji Nakamura rebuffed government pressure for more BOJ
action to fight deflation, saying that pumping liquidity into the
financial system alone will not put an end to debilitating price
falls.

The heavily indebted government fears deflation and a strong
yen could push Japan back into recession in the run-up to upper
house elections. Analysts say it may urge the reluctant central
bank to buy more government debt or expand a funding operation it
introduced in December to prevent that.

“The more the BOJ talks about the limits to its power, the
more pressure the government may put on it,” said Naomi Hasegawa,
senior strategist at Mitsubishi UFJ Securities.

But Nakamura said the fight against deflation must be shared.

“In order to solve demand shortages, it is important for the
BOJ, the government and private sector firms each to play their
own role,” Nakamura told business leaders.

He stressed the need for innovation in the private sector for
creating demand, but offered few other clues on what fiscal or
monetary policy options there were to get prices rising.

The Bank of Japan said last week that deflation would be
milder than it had previously forecast in the fiscal year
beginning in April and the following year.

But Finance Minister Naoto Kan has said he felt the central
bank could do more to help ease deflation, and analysts think the
government could pressure the BOJ more if the yen rises further
and threatens the export-driven recovery.

The government, whose support rate is slipping ahead of upper
house elections due in summer, has little room to expand spending
with the national debt already nearing 200 percent of GDP.

The BOJ is virtually alone in expanding monetary easing. The
Federal Reserve and the European Central Bank have said they will
start phasing out their emergency lending and liquidity
facilities in light of improvements in credit markets.

PUSHING BACK

Nakamura returned some of the government pressure, saying
that relying heavily on emergency fiscal spending could lead to
serious problems and that Japan needed to consider long-term
fiscal reconstruction.

“Concerns about the sustainability of government debt are
increasing worldwide…Japan is not in a position to sit back,”
he warned.

Standard & Poor’s last month cut the outlook on Japan’s AA
debt rating to negative, saying the policy bind could lead to a
downgrade unless measures were taken to stem fiscal and
deflationary pressure. [ ]

The government is due to map out a medium-term fiscal plan by
June, but it is trapped between the need to prevent the economy
slipping back into recession and the need to manage the huge
public debt.

“It is natural for central bank policymakers to call for
fiscal reconstruction when debate about exit strategies globally
is focusing more on fiscal issues than monetary policy,” said
Masamichi Adachi, senior economist at JPMorgan Securities Japan.

“The government and the BOJ need to talk to each other more
about the fiscal problem, but that hasn’t happened in Japan so
far,” he said.

The Japanese economy started to recover from the second
quarter of last year and it is expected to post fairly robust
growth for the fourth quarter. [ID:nTOE61007I]

But Nakamura expressed caution, saying that the downside
risks were still larger than those on the upside and that the
bank won’t rule out any policy options in responding to economic
conditions ahead.

Most economists think the economy will slow down in the first
half of 2010 and, as the recovery is driven mostly by strong
exports to Asia, it could be hurt by any further rise in the yen.

Nakamura cautioned strong demand in Asia may cause Japanese
firms to shift production abroad, thus limiting recovery in
domestic capital spending and jobs even as the overseas economy
recovers.

The 10-year JGB yield on Thursday rose 1.5 basis points to
1.370 percent (JP10YTN=JBTC: ), its highest since mid-November. But
analysts and traders said few in the market were expecting JGB
yields to rise sharply as investors believed the BOJ could
further ease monetary policy to fight deflation.

The BOJ has been reluctant to ease policy further as it
expects the pace of falls in prices to ease gradually.

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UPDATE 2-BOJ’s Nakamura rebuffs govt pressure over deflation