WRAPUP 2-BOJ may revise up CPI forecast but deflation to drag

* BOJ may mull raising fiscal 2011/12 CPI forecast – sources

* Wholesale prices fall 1.3 pct year/year in March

* Shirakawa: BOJ to maintain ultra-easy monetary policy

* Shirakawa rules out BOJ buying of property, shares
(Adds details)

By Leika Kihara and Stanley White

TOKYO, April 13 (BestGrowthStock) – The Bank of Japan could say this
month that consumer prices will stop falling next fiscal year,
sources say, but analysts said it would keep its easing bias as a
full-fledged escape from deflation is still a distant goal.

That would mark an upgrade to the BOJ’s current price
forecast for the year to March 2012, sources familiar with
central bank thinking said.

Economists say that while this is achievable, price momentum
won’t be strong enough to signal a decisive end to deflation
given the large gap between supply and demand.

The central bank has given slightly more positive views on
the economy in the last week due to an export-driven recovery.
The BOJ has also indicated it is open to further easing even as
the economy improves because monetary policy would have a bigger
impact. [ID:nTOE63B009]

The BOJ is faced with the delicate task of acknowledging
improvements in the economy without giving the impression that it
is ready to withdraw monetary easing. Still, one economist voiced
concern that by raising its price forecast, the BOJ risked being
misunderstood.

“If the BOJ upgrades this forecast they would be sending the
wrong message to businesses and the foreign exchange market (Read more about international currency trading. ),”
said Shane Oliver, head of investment strategy and chief
economist at AMP Capital Investors in Sydney.

“It might signal less inclination to take further easing. I’m
concerned Japan hasn’t done enough, because consumers and
businesses are still operating with a deflation mentality.”
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More stories on the Japanese economy [ID:nECONJP]
Graphic on Japan prices http://link.reuters.com/jyg57j
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BOJ Governor Masaaki Shirakawa said on Tuesday the central
bank would continue its efforts to beat deflation by maintaining
its very loose monetary policy, but he gave no hints on whether
additional easing measures were on the horizon.

Wholesale prices fell 1.3 percent in the year to March, the
smallest drop in more than a year as falls narrowed for the
seventh straight month, but this was largely due to rising energy
and commodity costs, BOJ data showed. [JPCGPY=ECI]

Together with improvements in the economy, though, this may
prompt the BOJ to revise up its consumer price forecast for the
year to March 2012 in its twice-yearly outlook report due on
April 30, sources said. [ID:nTKF106910]

“Both wholesale and consumer prices are likely to stay on an
upward bias in coming months,” said Junko Nishioka, chief Japan
economist at RBS Securities.

“But this is unlikely to lead to a change in the Bank of
Japan’s loose monetary policy as the BOJ focuses on the price
trend rather than short-term moves.”

The BOJ currently expects deflation to last for three years
until March 2012. It will review that prediction as well as its
economic growth forecasts in its twice-yearly outlook report.

It may lift its consumer price forecast for the year to March
2012 to zero change or slight positive growth from a 0.2 percent
drop forecast three months ago, the sources said.

Still, that remains far below the 1 percent consumer
inflation that Finance Minister Naoto Kan said he wanted to see,
and roughly the level that the BOJ itself sees as signifying
desirable price growth.

Analysts also say slack domestic demand will continue to put
downward pressure on consumer prices.

Domestic final goods prices, a component of the wholesale
price index that loosely tracks the consumer price index, fell
0.7 percent in the year to March after falling 0.8 percent in
February.

Deflation can be damaging to an economy as consumers put off
spending if they expect prices to keep falling, which can in turn
discourage companies from increasing capital spending. Deflation
can also discourage borrowing, because real interest rates are
higher than nominal rates.

Speaking in parliament on Tuesday, Shirakawa repeated that he
expects annual consumer price falls to narrow as the nation’s
output gap shrinks reflecting improvements in the economy.

He ruled out the possibility of the BOJ expanding its balance
sheet through purchases of property or shares, when asked by a
lawmaker whether that was an option.

At the BOJ’s mid-March policy-setting meeting, many board
members played up the effectiveness of extra monetary easing even
as the economy recovers and deflation eases, the minutes of the
meeting showed on Monday.

At that meeting, the BOJ eased policy by doubling to 20
trillion yen ($214.6 billion) the funds available to banks for
three-month loans at its policy rate of 0.1 percent, following a
drumbeat of government pressure. [ID:nSGE62G03I]

If the BOJ were to ease again, possible options could include
further expanding the three-month loans or other money-market
operations to bring down short-term lending rates, economists
say.

The BOJ introduced the three-month funding scheme in December
after the government declared Japan was in deflation and prodded
the central bank to do more to fight price falls.

A solid recovery in exports to Asia has driven Japan’s
recovery since last year after it suffered its worst recession in
many decades, but demand in Japan has remained weak except for
stimulus-fuelled buying of durable goods, leaving prices under
pressure.

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WRAPUP 2-BOJ may revise up CPI forecast but deflation to drag