UPDATE 4-Japan PM Kan vows firm moves against strong yen

* Japan PM says to meet BOJ governor after Aug. 30

* Dollar edges higher after Kan says to take firm measures

* BOJ under pressure for further action to beat deflation

* Japan July core CPI falls 1.1 pct y/y, matches forecast

* Deflation unlikely to ease much in weak economy
-analysts
(Rewrites with PM Kan’s comments, details)

By Stanley White and Rie Ishiguro

TOKYO, Aug 27 (BestGrowthStock) – Japan’s prime minister said on
Friday he will take firm measures on currencies when needed and
will meet the Bank of Japan governor, increasing the
possibility the central bank will ease policy soon as it
confronts a surging yen.

The yen edged lower after Kan’s remarks as Japanese
policymakers struggle over how to put a cap on the currency,
which hit a 15-year high against the dollar this week and
threatens to derail an export-led recovery.

The ruling Democratic Party’s options on fiscal policy are
limited due to the country’s large debt burden, so it is
leaning on the central bank to ease policy to help the economy.

“There are investors who are expecting the Japanese
authorities to take some measures if the yen appreciates
sharply,” said Mitsuru Sahara, chief manager for currency
derivatives trading at Bank of Tokyo-Mitsubishi UFJ.

“It’s possible that the government’s stimulus steps and the
BOJ’s easing measures will be announced together, even before
its next meeting,” he said, referring to the central bank’s
rate review on Sept. 6-7.

“There’s a growing view that Japan could even conduct solo
intervention if the yen rises sharply.”

BOJ Governor Masaaki Shirakawa is scheduled to attend the
Federal Reserve’s seminar in Jackson Hole, Wyoming, until Aug.
30, and Kan said he would meet Shirakawa after he returns to
Japan.

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Graphic of CPI trends
http://link.reuters.com/pum57n

Package of Reuters reports on the yen

http://r.reuters.com/nef47n

More stories on the Japanese economy
[ID:nECONJP]

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Kan said the government would outline measures on Aug. 31
to support the economy and grapple with the strong yen.

“Excessive currency moves can harm the economy and the
financial system,” he told reporters after visiting a small
factory in the Tokyo suburbs. “We will take firm measures when
needed.”

The fate of any economic package could be complicated,
however, by a ruling Democratic Party leadership vote on Sept.
14, in which party powerbroker Ichiro Ozawa is challenging Kan.

The dollar rose slightly to 84.82 yen (JPY=: ) after Kan’s
comments, near its high for the session, but remained below the
closely watched 85 mark and not far from a 15-year low of 83.58
yen hit on trading platform EBS earlier this week.

Sources say the BOJ is considering easing policy further at
its upcoming rate review, or even before that, but it is
expected to opt for only a minor tweak of its funding framework
instead of bolder steps such as increasing its government bond
purchases. [ID:nTOE67Q04C]

Analysts say such a modest step would do little to slow the
yen’s rise or bolster the fragile economy.

BOJ HESITANT

Debt markets are already pricing in the chance of a BOJ
easing. With short-term rates already very low, investors are
pushing down the longer end of the curve, although the yield
curve steepened on Friday as banks sold super-long bonds to
take profits. [JP/]

The BOJ is hesitant to return to full-blown quantitative
easing since the policy, which involves flooding markets with
extra cash under a liquidity target, had little effect in
beating deflation when it was in place until March 2006.

Japan has not intervened in the currency market since March
2004, when it ended a 15-month 35 trillion yen selling spree
aimed at rescuing an economic recovery.

The firmer yen also threatens to delay Japan’s exit from
deflation, putting further pressure on the central bank to act.

Japan’s core consumer price index (CPI), which includes oil
products but excludes fresh food prices, fell 1.1 percent in
July from a year earlier, data from the internal affairs
ministry showed on Friday, matching the median market forecast.
It was slightly bigger than a 1.0 percent drop in June.
[JPCPI=ECI]

The core-core inflation index, which excludes food and
energy prices and is similar to the core index used in the
United States, fell 1.5 percent in July from a year earlier.

“Given the yen’s gains, exports will slump temporarily and
slow Japan’s economic recovery. Japan will thus remain in
deflation for another two to three years,” said Takeshi Minami,
chief economist at Norinchukin Research Institute.

“The BOJ may expand its fund-supply tool next month, but
the effect on short-term interest rates will be limited. It
needs to take bolder steps to beat deflation and the strong
yen, such as increasing outright government bond purchases,
although that’s unlikely to happen soon.”

The BOJ has justified holding off on aggressive measures to
beat deflation with its forecast that consumer prices will turn
positive in the fiscal year ending in March 2012.

The government steps due at the end of the month are likely
to delay the end of subsidies on purchases of energy-efficient
electronics.

But any positive effect on the economy will be limited as
spending under the stimulus plan will be small and any measures
taken by the BOJ will be minor and cosmetic, analysts say.
(Writing by Leika Kihara; Editing by Edmund Klamann & Kim
Coghill)

UPDATE 4-Japan PM Kan vows firm moves against strong yen