UPDATE 3-Japan Kan keeps up call for BOJ help vs deflation

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

* Kan: Monetary policy very important in battling deflation

* Says deflation needs to be beaten to fix Japan’s finances

* Kan: Fed discount rate hike not negative for Japan economy
(Adds more Kan comments)

By Tetsushi Kajimoto and Leika Kihara

TOKYO, Feb 19 (BestGrowthStock) – Japanese Finance Minister Naoto Kan
said he wanted to work with the Bank of Japan towards their
common goal of beating deflation, keeping up a drumbeat of
pressure on the central bank for further monetary easing.

The remark came a day after the BOJ held off on new policy
initiatives at a rate review and its governor, Masaaki Shirakawa,
fended off pressure by saying the government should respect the
bank’s independence to avoid unsettling markets. [ID:nTOE61H01T]

“The government and the BOJ are moving in the same direction
towards eradicating deflation. The government is working on this
through fiscal and tax policies, while the BOJ is doing its part
through monetary policy,” Kan told a news conference after a
cabinet meeting on Friday.

“I believe and I expect we can move forward on this under a
common understanding,” he said.

Kan’s comments were not in response to questions from
reporters, suggesting he was keen to state his views on the
matter. They come just days after he turned up the heat on the
BOJ by mentioning an inflation target.

The government, burdened with a massive fiscal debt, has been
leaning on the BOJ to support the fragile economy even as most
other major central banks consider rolling back steps put in
place during the global economic crisis.

The Federal Reserve on Thursday raised its emergency lending
rate for the first time since the financial crisis, lifting the
dollar and hitting bonds despite Fed assurances it was not a
prelude to a rise in its main policy rate. [ID:nSGE61I036]

Kan said the Fed’s hike was not negative for Japan’s economy
as it weakened the yen against the dollar.

DEFLATION BAD FOR NATION’S FINANCES

The BOJ has said it is committed to fighting deflation and
will keep interest rates near zero, but it has very few regular
policy options left and has been hesitant to yield to government
calls to buy more government bonds for fear of giving markets the
impression it is monetising debt.

Kan told parliament on Friday that beating deflation was
crucial for Japan to restore its finances while keeping the
economy afloat.

“If we drastically cut spending to maintain fiscal
discipline, it would have a negative effect on the economy and
therefore threaten our growth strategy,” Kan said.

“I’ve been reading the BOJ governor’s comments from yesterday
but deflation persists and we must escape deflation at all costs
if we are to achieve fiscal reconstruction.”

He added that said monetary policy plays a very important
role in Japan’s battle to beat deflation.

The JGB yield curve has steepened recently as expectations
the BOJ could ease again keep shorter-dated yields low while
longer maturities suffer on concerns about Japan’s fiscal state.

The BOJ’s easing bias contrasts with the Fed’s discount rate
hike, while the European Central Bank is due to decide in March
how it will handle the unwinding of emergency lending measures.

Kan said this week that inflation of 1 percent was the
minimum needed for price stability, a goal that has eluded Japan
in nine of the past 10 years.

That is in line with the BOJ’s view of price stability as
annual inflation of 2 percent or less and 1 percent as an ideal,
but the mere mention by Kan of such a goal in effect raised
pressure on the BOJ.

After Thursday’s policy meeting, Shirakawa ruled out adopting
an inflation-targeting policy and provided few clues on whether
the bank was considering easing monetary conditions further. The
BOJ in December yielded to government criticism by calling an
emergency meeting to announce a new funding operation.

Analysts say the BOJ could pump more money into the banking
system or offer cheap longer-term funds to bring down longer
rates such as on six-month paper, particularly if the yen rises
further and threatens to deepen deflation.

Deflation hurts the economy as it prompts households and
companies to hold back on spending to wait for even lower prices.

Core consumer prices fell 1.3 percent in the year to
December, while the GDP deflator, a broad gauge of price trends,
fell a record 3 percent in the fourth quarter, underlining the
growing price pressure in the world’s second-largest economy.

Investment Tools

For a graphic on Japan’s CPI, click on:

http://r.reuters.com/zyv99h

UPDATE 3-Japan Kan keeps up call for BOJ help vs deflation