WRAPUP 1-Japan gov prods BOJ for action, yen may be the target

* Govt says escape from deflation far off

* Urges BOJ to cooperate in lifting prices, stem yen rise

* Upgrades views on personal consumption, capex

* BOJ board meets this week, could ease policy

* Government’s main target is to curb yen strength

By Rie Ishiguro

TOKYO, March 15 (BestGrowthStock) – Japan’s government kept up
pressure on the central bank on Monday to loosen monetary policy
even as it upgraded its assessment of the economy for the first
time in eight months.

It reiterated in a monthly economic report that deflation
posed a risk to Japan and repeated its call for the Bank of Japan
to support the world’s second-biggest economy, which it said was
“picking up steadily”, a modest upgrade from “picking up” or
showing “signs of picking up” contained in reports back to July.

Finance Minister Naoto Kan said the Bank of Japan, which
reviews policy on Tuesday and Wednesday, understood the
government’s expectations.

But, with monetary policy already ultra-loose, some BOJ
policymakers question what can be achieved with further easing,
especially since the government and the central bank agree that
the economy is picking up. The policy rate is just 0.1 percent.

Simon Wong, regional economist at Standard Chartered in Hong
Kong, said the real target for the government is the yen.

“The government is putting pressure on the BOJ to maintain
some form of monetary easing to keep the value of the yen down,”
he said, adding he expected the central bank eventually to raise
its government bond purchases beyond the current 21.6 trillion
yen a year.

“Deflation is entrenched. The market is expecting the BOJ to
do something, so if they disappoint the yen could strengthen.”

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Stories on Japan’s economy [ID:nECONJP]

What the BOJ might decide this week [ID:nTOE62A08Z]

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The yen rose in November to a 14-year high beyond 85 per
dollar, sparking complaints from exporters because a strong
currency undermines the price competitiveness of their goods on
world markets.

A strong currency also makes import prices cheaper, so can
add to deflationary pressures.

Shortly after the yen reached the 14-year high, the central
bank called an emergency meeting to ease policy, helping reduce
the allure of the yen by pushing its short-term lending costs
below those of the U.S. dollar. [ID:nT374859]

Kan seemed to underline that the currency was in the
government’s cross-hairs by saying on Monday that the euro’s woes
could affect it.

“The yen is relatively stable now, but concerns remain that
the euro’s fall could affect the yen in the near future. I think
that’s a risk factor,” he told reporters, referring to the
pressure on the euro from concerns about heavily indebted euro
zone countries such as Greece.

The yen is now trading around 90.7 per dollar and has eased
from about 89 since a newspaper report suggested the Bank of
Japan would ease policy this week.

TWO ISSUES, DIFFERENT LEVEL

The BOJ, which sees deflation lasting a few more years, is
leaning towards easing policy this week by extending or expanding
the three-month bank lending operation put in place in December,
sources have told Reuters.

But, the BOJ policy board is split on the need to loosen
policy with some members saying a shift is not justified since
the economy is picking up in line with central bank expectations.
[ID:nTOE6290C0]

In addition, bank lending broadly is falling because of weak
demand for funds, a further argument against the need for easier
funding conditions.

“The government wants the BOJ to show its easing stance
because it is concerned about the yen’s persistent strength,
which would deepen deflation and hurt an economy that relies
heavily on exports,” said Takumi Tsunoda, an economist at Shinkin
Central Bank Research Institute.

“The government sees more benefits in monetary easing now
than later because such a move would support exports by keeping
the yen from rising too much.”

Consumer prices excluding food and energy costs, the
narrowest price measure in Japan which is similar to the core
index used in the United States, fell from a year earlier for the
13th straight month in January. [ID:nTOE61O06H]

Kan says he wants an end to deflation this year and that
inflation of 1 percent is desirable. Some lawmakers are worried
that deflation could tip the economy back into a downturn.

“The upgrade of the government’s economic view does not mean
Japan is getting closer to overcoming deflation. We discuss the
two issues on a different level,” Keisuke Tsumura, a
parliamentary secretary of the Cabinet Office in charge of
compiling the economic report, told a news conference.
[ID:nTKF106890]

“Escape from deflation is still far off,” he said.

TRYING TO LIFT EXPECTATIONS

The government has little room to boost its spending to
support the economy since public debt is nearing 200 percent of
GDP, so is leaning on the BOJ for more monetary action.

Its prodding of the BOJ is designed not just to stimulate the
economy, a government source said, but to boost public
expectations that prices will start rising soon, which it sees as
a key factor in beating deflation.

Boosting the economy is crucial for the Democratic Party-led
government, whose popularity ratings are slipping ahead of upper
house elections expected in July. [ID:nTOE62801F][ID:nTOE60B098]

Top government spokesman Hirofumi Hirano on Monday attributed
the decline in ratings partly to the weakness in the economy.

In the report, the government was more upbeat about personal
consumption. Tsumura said the positive effects of government
stimulus on low-emission cars and consumer electronics were
spreading.

But it said the economy still faced difficulties, including
high levels of job losses.

Thus, Tsumura said, it is too early to declare the economy
has entered a recovery, adding that domestic demand remained weak
and job losses may rise again.

Stock Market Advice
(Additional reporting by Linda Sieg; Editing by Neil Fullick)

WRAPUP 1-Japan gov prods BOJ for action, yen may be the target