WRAPUP 2-BOJ Yamaguchi says ready to act as deflation weighs

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

* BOJ deputy governor says will strive to beat deflation

* Stops short of saying what specific steps BOJ has in mind

* Warns govt markets watching how Japan tackles fiscal woes

* Japan exports jump; little China tightening impact

* Strong export data contrasts with govt worries on outlook
(Adds Yamaguchi comments, trade data details)

By Leika Kihara

KAGOSHIMA, Japan, Feb 24 (BestGrowthStock) – Bank of Japan Deputy
Governor Hirohide Yamaguchi said the central bank was ready to
act to beat deflation, leaving room for more monetary easing amid
a steady drumbeat of government pressure for BOJ steps to support
the economy.

But Yamaguchi, a career central banker seen as close to the
governor, offered few clues on what exactly the Bank of Japan
might do beyond keeping interest rates near zero.

While Japan struggles with weak domestic demand, which
Yamaguchi described it as the root of the deflation problem,
exports have been rebounding.

Exports marked their third-biggest annual gain on record in
January due to rising chip and auto shipments, trade data showed,
allaying concerns that China’s moves to rein in lending may choke
off demand there and put a brake on Japan’s economic recovery.

Still, this positive sign is unlikely to stop the government
from pushing the BOJ to combat deflation as Prime Minister Yukio
Hatoyama’s cabinet eyes an upper house election expected in July.

“The BOJ can’t escape the fact that prices are still
declining,” said David Cohen, director of Asian economic
forecasting at Action Economics in Singapore.

“The BOJ would be happy to stay on hold indefinitely, but
they could do something to lower short-term rates to appease the
government. Price declines will narrow as long as the global
economy continues to recover — but a decline is a decline.”

For a graphic on Japan’s deflation, click on:

http://r.reuters.com/zyv99h

Yamaguchi said the BOJ’s key task was to boost demand and
show its determination to beat deflation so the public doesn’t
start to think price falls will persist and hold off on spending.

“It’s important to make sure corporate sentiment doesn’t
shrink, so that deflation doesn’t trigger economic weakness and
further aggravate deflation,” he said in a speech to business
leaders in Kagoshima, southern Japan, on Wednesday.

“If deemed necessary given economic and price conditions and
changes in financial conditions, the BOJ is always prepared to
implement appropriate measures at the appropriate time.”

The government, weighed down by a huge fiscal debt, has been
urging the BOJ to support the fragile economy even as most other
major central banks mull rolling back stimulus steps put in place
during the global crisis.

Many analysts say the BOJ could pump more money into the
banking system or offer cheap longer-term funds to bring down
longer-dated interest rates such as six-month rates, particularly
if the yen rises further and threatens to deepen deflation.

“Government pressure for further monetary easing is still
there and may increase if the yen jumps or stock prices fall
towards the fiscal year-end” in March, said Izuru Kato, chief
economist at Totan Research in Tokyo.

“The BOJ is probably considering how it should respond when
government pressure increases.”

Japan’s yield curve has steepened as expectations the BOJ
could ease monetary policy again has kept shorter-dated yields
low, while longer-dated maturities have suffered from concern
about Japan’s fiscal debt, which is nearly twice the size of the
economy.

In a subtle warning to the government, Yamaguchi said that
while markets have smoothly absorbed the huge amount of public
debt so far, the country’s fiscal state was in a severe state.

“Long-term rates as well as other markets are always focusing
on how the government deals with (Japan’s fiscal problem),” he
told a news conference.

SOFT PATCH

A rebound in exports has been a major driving force behind
Japan’s recovery since the second quarter of 2009, with shipments
to Asia leading the way thanks to strong growth in the region.
Asia accounts for more than half of Japan’s exports.

Exports to China, the destination for 19 percent of Japan’s
shipments abroad, logged their biggest annual rise since August
1985, while those to the United States rose for the first time in
nearly two and a half years on an annual basis, Ministry of
Finance data showed. [JPEXPY=ECI]

Compared to the previous month, Japan’s exports rose for the
11th consecutive month in January.

For a graphic of Japan’s exports by destination, click:

http://link.reuters.com/gup52j

Steelmakers like Nippon Steel Corp (5401.T: ) and JFE Holdings
Inc (5411.T: ) have increased their exposure to Asian markets as
demand at home stagnates. Revenues from overseas markets now
account for nearly half of their overall sales.

But strong Asian growth may in fact delay Japan’s exit from
deflation as it lures more local firms offshore, depriving the
country of new jobs and investment. [ID:nTOE61B024]

Deflation hurts the economy as households put off spending on
hopes that prices will fall further, forcing companies to cut
prices to lure consumers.

Data due Friday will likely show the core consumer price
index fell 1.4 percent in January from the previous year, with
annual price falls accelerating for the first time since they
slumped by a record in August.

Investment

(Additional reporting by Rie Ishiguro, Stanley White; Editing by
Hugh Lawson)

WRAPUP 2-BOJ Yamaguchi says ready to act as deflation weighs