Japan govt ups econ view but keeps deflation warning

Mon Mar 15, 2010 2:50am EDT

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

* Govt says escape from deflation still distant

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

* Upgrades views on personal consumption, capex

* BOJ board meets this week to mull possible easing

By Rie Ishiguro

TOKYO, March 15 (Reuters) - Japan's government upgraded its assessment of the economy on Monday for the first time in eight months, but reiterated that deflation posed a risk and called on the Bank of Japan for further economic support.

The government has said since July last year that the economy was showing "signs of picking up" or just "picking up", but it added the word "steadily" in its monthly report to suggest a modest upgrade in its view.

The government said it will work with the BOJ to beat deflation and ensure an economic recovery, maintaining pressure on the central bank to loosen policy at a two-day policy review ending on Wednesday.

"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 report, told a news conference.

"Escape from deflation is still far off," he said.

Consumer prices excluding food and energy costs, the narrowest measure in Japan that 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]

Finance Minister Naoto Kan says he wants an end to deflation this year and that inflation of 1 percent is desirable.

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

But the policy-setting board is split, partly because some policymakers see little economic justification for easing further, especially when the economy is improving along the lines of the central bank's official expectations. [ID:nTOE6290C0]

"I hope the BOJ will take appropriate policy steps in view of Japan's current economic situation," Deputy Finance Minister Yoshihiko Noda said on Monday. [ID:nTKX006703]

TRYING TO LIFT EXPECTATIONS

The government's efforts to push the BOJ are 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.

The government also wants the BOJ to act pre-emptively to stave off any appreciation in the yen JPY=, that could dent exports and deepen deflation, analysts said.

"If the BOJ went into aggressive easing ... it would weaken the yen, and a weak yen is probably good for equity prices, especially the ones that drive the index, and that would probably spill into real estate prices and make property owners more optimistic about the future," said Robert Feldman, chief economist at Morgan Stanley in Tokyo.

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.

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.

In the economic report the government was more upbeat about personal consumption, and Tsumura said the positive effects of government stimulus targeted at 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. (Additional reporting by Linda Sieg; Editing by Neil Fullick)

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