WRAPUP 2-Japan’s finmin pressures BOJ, deflation deepens

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

* Finmin Kan urges BOJ to work in line with gov’t policies

* Shirakawa rules out more bond buying

* Narrowest inflation measure falls at record pace in Dec

* Forex volatility was behind BOJ’s Dec. 1 easing-minutes

* Industrial output rises on firm exports to Asia
(Adds policymaker comments)

By Leika Kihara

TOKYO, Jan 29 (BestGrowthStock) – Japan’s finance minister urged
the Bank of Japan on Friday to align policy with the deeply
indebted government’s efforts to fight deflation, maintaining
pressure for possible monetary easing or even government bond
purchases.

BOJ Governor Masaaki Shirakawa did not rule out any policy
options but reiterated the current level of bond buying — a
step some policymakers have called for to tame bond yield gains
— was appropriate for now. [ID:nTOE60S05C]

Prime Minister Yukio Hatoyama echoed his finance chief,
Naoto Kan, in calling for BOJ cooperation, telling parliament
that the government will work with the central bank to overcome
falls in prices. Data showed Japan’s narrowest measure of
consumer inflation fell at a record pace in December.

Kan, known as one of the most vocal cabinet critics of the
BOJ, took a slightly stronger stance than Hatoyama, calling for
the central bank to take a flexible approach on policy to
support the economy.

“I expect the BOJ to support the economy by guiding
monetary policy appropriately and flexibly, while keeping close
contact with the government, in a way that is consistent with
government efforts,” he said on a policy speech.

Hatoyama’s government, which faces an upper house election
in mid-2010, has little room to boost spending further as the
national debt is now almost twice as big as the country’s
annual gross domestic product. Credit ratings agency Standard
and Poor’s this week warned that it may cut the country’s
rating. [ID:nSGE60P08I]

Kan said restoring fiscal health is indispensable for
steady economic growth.

The BOJ has been hesitant to increase its bond buying
further, arguing that doing so would give markets the
impression the bank is underwriting public debt.

“Trying to influence interest rates or monetising public
debt would go against the central bank’s basic principle, which
is to achieve sustainable economic growth with price
stability,” Shirakawa told a forum on Friday.

“In supplying ample funds to the market, I think the bank’s
current bond purchasing amount is appropriate,” he said.

The BOJ currently buys 21.6 trillion yen ($240 billion) of
government bonds from the market per year.

YEN MOVES

The central bank, under pressure from the government, has
toughened its stance on deflation and on Dec. 1 decided to
offer commercial banks more short-term funds. [ID:nT374859]

BOJ policymakers fretted about sharp yen rises when they
adopted the new measure, minutes from the meeting showed, a
sign that renewed yen (JPY=: ) rises may be among the factors
which may trigger fresh action in the future. [ID:nTOE60S00H]

The move was aimed at pushing down longer-term money market
rates, which many board members thought was the most effective
way of supporting the economy, it showed.

David Cohen, director of Asian economic forecasting at
Action Economics in Singapore, said the central bank could take
further action depending the yen’s move.

“It’s possible for the BOJ to extend its three-month funds
(operation) as one way of deflecting political pressure,” he
said. “They will watch dollar/yen for sure, and there are
enough forces in Japan that don’t want the dollar to go below
85 yen.”

The so-called “core-core” consumer price index, which
strips out the effect of volatile food and energy costs, fell
1.2 percent in December from a year earlier after a 1.0 percent
drop in November. It was the biggest drop since the series
began in 1970. [ID:nTOE60R091]

The core-core inflation index is similar to the core index
used in the United States.

For a graphic on consumer price moves in Japan, U.S. and
Europe, see
http://graphics.thomsonreuters.com/0110/JP_CPI0110.gif

“The pace of decline in the core-core CPI accelerated and
we should take this to mean that deflation remains a problem,”
said Yasuo Yamamoto, senior economist at Mizuho Research
Institute.

“The BOJ needs to continue its easy monetary policy. For
the government’s part, they may need to consider another
stimulus package, as the economy is stagnating.”

The government has gradually increased pressure on the BOJ
to respond to a lacklustre economy, which is becoming more of a
risk to Hatoyama. [ID:nTOE60R036]

“The biggest challenge with economic and fiscal policy for
the time being is to bring the Japanese economy back on a solid
recovery path,” Hatoyama said, pledging to avoid a return to
recession with planned state budgets and reiterating that the
government will work with the BOJ to defeat deflation.

The government and BOJ agree stimulating demand is
essential to conquering deflation, but the BOJ has already
committed to keeping rates at a very low level and the
government’s support for households could take a long time to
have an impact.

Industrial output rose a less-than-expected 2.2 percent in
December following a similar rise in the previous month, data
showed on Friday. It was the 10th straight month of increase
but government officials remain cautious on the outlook, saying
the recovery will likely slow in the coming months.

Investment Analysis

(Additional reporting by Tetsushi Kajimoto, Stanley White, Rie
Ishiguro and Hideyuki Sano; Editing by Kazunori Takada)

WRAPUP 2-Japan’s finmin pressures BOJ, deflation deepens