UPDATE 2-Shirakawa signals BOJ not ready to buy more bonds

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

* Shirakawa: Market trust in policy will keep yields low

* Finmin Kan repeats BOJ, govt working to beat deflation
(Adds details on yield curve, JGB demand)

By Leika Kihara

TOKYO, March 3 (BestGrowthStock) – Bank of Japan Governor Masaaki
Shirakawa said market trust in central bank policy was key for
keeping bond yields stable, signalling his reluctance to buy
more public debt despite government pressure for more BOJ action
to beat deflation.

The government has been putting more pressure on the BOJ to
help support a fragile economy such as by boosting its buying of
government bonds from the market, a move the bank has resisted
for fear that it would hurt its credibility.

Shirakawa told parliament that as the world economy
recovers, financial markets are increasingly focusing on the
huge fiscal deficits accumulated by countries as they fought the
global financial crisis.

But Japanese long-term interest rates have remained low due
to the market’s cautious economic and price outlook, as well as
sound economic policies, he said.

“The risk premium (on long-term rates) isn’t increasing,
which shows the policies of the government and the Bank of Japan
are gaining market trust,” Shirakawa told a budget committee in
the upper house of parliament.

“We hope to make an effort so that our policies gain market
trust and lead to stable long-term interest rates,” he said on

The government’s fiscal options are limited by a public debt
that is already close to 200 percent of GDP. But Prime Minister
Yukio Hatoyama needs to look proactive ahead of an upper house
election expected in July especially since his ratings are
dropping due to funding scandals and doubts about his

Support for Hatoyama’s government has dropped below 40
percent in some recent surveys, although the main opposition
Liberal Democrats have not made significant gains.

The government’s ambitious spending agenda has sparked
concerns about Japan’s fiscal discipline, leading to a
steepening in the yield curve since Hatoyama took office.

The spread between yields on two- and 10-year government
debt last stood at 1.175 percentage points after widening to
1.220 percentage points last month, the steepest in almost four

Finance Minister Naoto Kan repeated on Wednesday that the
government and the Bank of Japan are making efforts to escape
deflation at an early date.

“The government and the BOJ have a common understanding
about the need to beat deflation and are making efforts to do
this,” Kan, also deputy prime minister, told the same committee.

Many analysts say the next BOJ move may be to expand a
fund-supply operation it put in place in December. But some say
the government wants more aggressive action, such as more BOJ
buying of government bonds.

The BOJ argues that increasing its government bond purchases
from the current 21.6 trillion yen ($243 billion) per year won’t
necessarily tame bond yield gains and may backfire by casting
doubt on the bank’s grip on monetary policy.

Investor demand for Japanese government bonds has remained
reasonably healthy, which makes prodding the BOJ into increasing
its bond purchases seem a less urgent task.

The Ministry of Finance’s 2.2 trillion yen sale of 10-year
bonds drew bids 3.40 times the offer on Tuesday, above the
average of 2.85 for the past 12 sales.

Hatoyama’s Democratic Party needs to win an outright
majority in the upper house poll to escape reliance on two small
coalition parties to smooth policymaking. At present, the
Democrats need the backing of banking minister Shizuka Kamei’s
People’s New Party in the chamber, which can delay bills.

Stock Market Research Tools
(Additional reporting by Stanley White, Rie Ishiguro; Editing
by Hugh Lawson)

UPDATE 2-Shirakawa signals BOJ not ready to buy more bonds