UPDATE 2-BOJ warns economic outlook weak, affirms easy policy pledge

Tue Jan 15, 2013 2:01am EST

* BOJ Shirakawa says output, exports weakening
    * Warns of risks, continued overseas slowdown
    * Sticks to pledge of powerful monetary easing


    By Leika Kihara
    TOKYO, Jan 15 (Reuters) - Bank of Japan Governor Masaaki
Shirakawa said the central bank will continue with powerful
monetary easing as the economy is likely to remain weak for the
time being, hardening market expectations that it will expand
stimulus again this month.
    Prime Minister Shinzo Abe kept up pressure on the central
bank ahead of its policy-setting meeting next week, repeating
his call for bolder monetary easing in talks with economic aides
on Tuesday.
    Shirakawa stuck to the central bank's view that the economy
will eventually resume a moderate recovery as overseas growth
gradually emerges from a slowdown, helped in part by resilience
in domestic demand.
    But he warned that the outlook remained highly uncertain,
pointing to risks such as a continued slowdown in overseas
growth and a diplomatic row with China that has hurt sales in
one of its biggest export markets.
    "Exports and factory output are declining as overseas
economic growth continues to slow," he told a quarterly meeting
of the central bank's regional branch managers on Tuesday.
    The BOJ is under intense pressure from Abe, whose party
surged to power in a lower house election in December last year,
to take bolder action to beat deflation.
    The central bank, which eased policy five times in 2012,
will thus consider expanding stimulus again and double its
inflation target to 2 percent at the rate review on Jan. 21-22,
sources have told Reuters. 
    Expectations of further easing have weakened the yen and
nudged up Tokyo's Nikkei share average to a 32-month high on
Tuesday, offering a relief to Japan's exporters struggling from
slumping global sales.
    But Economics Minister Akira Amari warned that excessive yen
weakness could have its own drawbacks by boosting the cost of
imports, which triggered a yen rebound from its 2-1/2-year low.
    "Yen falls are good for exports, but excessive yen weakness
affects import prices and could have a negative effect on
people's livelihood," Amari told a news conference.
  
    
    REGIONAL ECONOMIES GLOOMY
    The world's third largest economy slipped into a recession
that analysts say began in the first half of 2012 as the global
slowdown and weak sales to China hit exports and factory output.
    Many analysts expect the economy to emerge from recession by
mid-year as overseas growth picks up, although Japan has been
waging a long battle to escape deflation that has plagued the
country for nearly two decades.
    The BOJ cut its assessment of eight of Japan's nine regional
economies, the first time in four years that it made downgrades
for so many regions for two straight quarters, in a sign of the
broadening pain from slumping exports. 
    "Business sentiment, mainly that of manufacturers, is
worsening. Capital expenditure is weak as a whole, although
resilience is seen in non-manufacturers' spending," Shirakawa
told the branch managers' meeting.
    The gloomy assessment will give the BOJ justification to
ease again next week, although any further stimulus will be more
in response to unrelenting pressure from Abe, analysts say.
    The central bank is vulnerable to political interference as
Abe has the power to choose a candidate to succeed Shirakawa,
whose term expires in April. Abe's nomination, however, needs
approval by both houses of parliament to take effect.
    Abe invited his economic advisers, most of them vocal
advocates of aggressive BOJ easing, to his official residence on
Tuesday to hear their views on monetary policy.
    "The prime minister said the BOJ's monetary easing was
particularly important for Japan to beat deflation," a
government official told reporters after the meeting.
    The discussions were based on the assumption that the BOJ
will issue a joint statement with the government, the official
said.
    The government is negotiating with the BOJ to issue such a
statement to make the bank accountable to achieving 2 percent
inflation target, double its current goal set in February last
year.
    The central bank is likely to accept Abe's calls for a
medium-term target of 2 percent inflation, but is opposed to
setting a specific deadline for achieving it and adding job
growth to its mandate for fear of binding its hands on future
monetary policy. 
    The statement is expected to be issued after the BOJ's
policy meeting next week, when the central bank will also
conduct a quarterly review of its long-term economic forecasts.
    The BOJ is set to cut its economic forecast for the current
fiscal year ending in March from a 1.5 percent expansion
projected three months ago, sources said. A Reuters poll in
December produced a median forecast for the economy to grow 1.0
percent in the current fiscal year.
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