UPDATE 3-Japan Kan says more BOJ action may be needed-media

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

* Finmin Kan says beating deflation is urgent

* Kan: 6 trln yen budget shortfall seen for 2011/12

* Doesn’t rule out campaign-pledge review to trim spending

* BOJ chief economist: will keep easy monetary policy
(Adds BOJ economist’s comments)

By Rie Ishiguro

TOKYO, Feb 1 (BestGrowthStock) – The Bank of Japan may need to do
more to beat deflation, the finance minister said in a newspaper
interview, keeping pressure on the central bank to help support
a fragile economic recovery.

Naoto Kan, known as one of the most vocal cabinet critics of
the BOJ, told the Nikkei daily that Japan must overcome
deflation sooner than in five or 10 years’ time.

“The government and the BOJ agree that Japan needs to escape
deflation,” Kan was quoted as saying in the interview that ran
on Monday.

“Unfortunately, deflation is not ending. Efforts on monetary
policy may be needed in some parts.”

Kan also said the government would need an extra 6 trillion
yen ($66.5 billion) to finance social security costs in the
fiscal year from April 2011, adding to concerns about Japan’s
bulging public debt.

He said he would not rule out reviewing the ruling
Democratic Party’s campaign pledges to rein in spending, the
newspaper said.

The new government led by the Democrats, whose support rate
is slipping, is determined to keep the economy afloat ahead of
an election for parliament’s upper house in mid-2010.

But with Japan’s public debt nearing 200 percent of GDP,
there is little room for fiscal expansion. Credit ratings agency
Standard and Poor’s last week warned that it may cut the
country’s debt rating. [ID:nSGE60P08I]

If Japan slips into another recession or concern over the
country’s huge public debt pushes up bond yields, the BOJ may
come under government pressure for more aggressive policy
action, such as increasing its buying of government bonds.

DETERMINED TO FIGHT DEFLATION

The BOJ’s chief economist, Kazuo Monma, said the bank sees
the fight against deflation as its top priority in guiding
monetary policy.

“We won’t waver in our determination to maintain our easy
monetary policy until Japan pulls out of deflation,” Monma said
on Monday at an event hosted by the Japan National Press Club.

While the risk of Japan’s economy “falling off a cliff” has
declined, a full pickup in household consumption may not come
until the fiscal year beginning in April 2011, Monma said.
[ID:nTKF106829]

Japan’s narrowest measure of consumer prices fell at a
record pace in December due to persistently weak domestic
demand. [ID:nTOE60R091]

The BOJ is forecasting three years of deflation and has
pledged to keep rates near zero until prices start rising again,
convincing markets that rates will stay very low until around
early 2012.

Deflation hurts the economy as households hold back on
spending in the hope of further price falls, causing a vicious
cycle of weak demand and price cuts.

Kan last week urged the BOJ to align its policy with the
deeply indebted government’s efforts to fight deflation,
maintaining pressure on it for possible monetary easing or even
more government bond buying.

Analysts say the BOJ may be urged to take further easing
steps such as extending the fund-supply operation it introduced
in December or increasing its monthly buying of government
bonds.

The BOJ has been hesitant to increase its bond buying,
arguing that doing so would give markets the impression the bank
is underwriting public debt.

In the Nikkei interview, Kan said the government was likely
to face a 6 trillion yen revenue shortfall in 2011/12 to pay out
twice the amount of child allowances as in the previous year and
to finance growing pension and other social security costs.

While the budget hole can be plugged either by cutting
spending, raising tax or increasing new bond issuance, Kan
stressed that he intends to overhaul special accounts some see
as a hotbed of wasteful spending, the Nikkei said.

Investment Analysis
(Additional reporting by Leika Kihara; Editing by Hugh Lawson)

UPDATE 3-Japan Kan says more BOJ action may be needed-media