WRAPUP 2-BOJ sees fastest economic growth in decade in 2010/11

* BOJ sees 2.6 pct growth in FY2010/11 vs prev 1.8 pct

* Keeps cautious outlook on EU, cuts 2011/12 GDP f’cast

* Policy rate steady at 0.1 pct, no new initiatives

* Pressure for more BOJ action may escalate – analysts

* Shirakawa to meet press; remarks due after 0715 GMT
(Adds detail)

By Leika Kihara

TOKYO, July 15 (BestGrowthStock) – The Bank of Japan forecast
emerging markets would help the economy grow 2.6 percent this
fiscal year, its fastest pace in a decade, but it warned that
Europe’s debt woes could pose a risk to the outlook.

It kept rates on hold at 0.1 percent and reiterated it
would maintain a very loose monetary policy to beat the
country’s stubborn deflation and support a still-fragile
economic recovery.

Analysts doubted the central bank would loosen policy
further unless risks to the recovery emerge, such as from
another sharp rise in the value of the yen, and prompt renewed
pressure from a government whose fiscal hands are tied to do
more to support the economy.

The nine-member board may have debated how the ruling
party’s defeat in upper house elections on Sunday could affect
the outlook for the economy, but for now it held off on new
policy initiatives in a unanimous vote.

“The BOJ’s previous growth forecasts were too conservative,
so the upward revision (for 2010/11) was well deserved. It
means the BOJ’s forecast of a moderate economic recovery is
unchanged,” said Yuichi Kodama, economist at Meiji Yasuda Life
Insurance.

“The latest growth forecasts suggest that the BOJ will
stand pat on policy in the near future, but this outlook could
easily change as the government may exert pressure on the bank
for further easing due to the tight fiscal conditions.”

Reflecting solid exports to Asia, the BOJ stuck to its
projection of a moderate recovery in Japan, but maintained its
warning that a close watch is needed on how Europe’s debt woes
may affect global economic and market developments.

The BOJ’s new growth forecast for the fiscal year ending
next March was increased from its April projection of 1.8
percent. It cut its growth forecast for next fiscal year to 1.9
percent from 2.0 percent.

By comparison, economists in a Reuters poll published on
Wednesday forecast the U.S. economy to grow 3 percent in 2010.
[ECILT/US]
<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Graphic on global interest rates http://r.reuters.com/dux57m Graphic on GDP growth http://r.reuters.com/jux57m Graphic of deflation forecast http://r.reuters.com/zex57m More stories on the Japanese economy [ID:nECONJP] ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

PLAGUED BY DEFLATION

The BOJ did not make substantial changes to its forecast
that Japan will remain in deflation this fiscal year, and see
only slightly positive consumer price growth in the following
year ending in March 2012. [ID:nTOE66C05D]

Deflation has been at the heart of the Japanese economy’s
sluggish performance for years, prompting firms and households
to hold off spending on expectations of further falls in
prices.

While the central bank’s June tankan business sentiment
survey showed a recovery was slowly taking hold in Japan, sharp
gains in the yen earlier this month and signs of a global
slowdown added to uncertainty for an economy already facing
slowing factory output and rising inventories.

China’s economy (Read more about the fastest growing economy.) slowed in the second quarter as the
government steered monetary and fiscal policy back to normal
after a record credit surge last year. [ID:nTOE66D06L]

Signs of softening U.S. growth also led Federal Reserve
officials to debate last month whether they should be ready to
consider easing credit further. [ID:nN14148574]

The BOJ is therefore hardly optimistic about the outlook.

The Democratic Party-led government may also pressure the
BOJ for action should renewed rises in the yen or slowing
global growth hurt the export-driven recovery. [ID:nTOE66A02T]

That means the BOJ’s policy bias remains towards monetary
easing, unlike several Asian economies that have begun
tightening such as South Korea and Thailand. [ID:nSGE668021]

The BOJ already loosely defines 1 percent core consumer
inflation as a desirable level of price growth. But calls for a
more binding price target may intensify, analysts say.

The Democrats have said beating deflation is among their
most important policy goals. Many other parties have urged the
BOJ to set a price target including Your Party, a small
opposition party that won 10 seats in the weekend election.
[ID:nTOE66D05R]

The International Monetary Fund said the BOJ could more
strongly commit to keeping monetary policy easy until core
inflation forecast is 1 percent or above. [ID:nN14149547]

Japan’s dire fiscal state leaves it with little room for
fiscal stimulus. Its public debt rose to 218 percent of GDP in
2009 from 188 percent in 2007, and without a fiscal adjustment
would approach 250 percent of GDP by 2030, the IMF said.

The BOJ has kept rates at 0.1 percent since late 2008, and
eased monetary policy last December and again in March by
setting up and later expanding a facility offering cheap funds
to banks.

Japan’s economic growth is expected to moderate from an
annualised 5 percent expansion in the first quarter, the
second-fastest among G7 countries, as the boost from government
stimulus measures tapers off.

The BOJ issues long-term economic and price forecasts each
April and October and reviews them three months later.
(Additional reporting by Tetsushi Kajimoto, Rie Ishiguro and
Kaori Kaneko; Editing by Kazunori Takada)

WRAPUP 2-BOJ sees fastest economic growth in decade in 2010/11