WRAPUP 2-Japan brushes aside FX manipulation claims ahead of G20
* Discomfort grows with Japan's monetary easing push
* Japan says easing aimed at deflation, not FX manipulation
* Yen hits 2-1/2 year low against the dollar
* Many countries favour weaker currency
* G20 an important test of Japan's financial diplomacy (Adds details on BOJ minutes, G20 meeting)
By Stanley White and Tetsushi Kajimoto
TOKYO, Jan 25 (Reuters) - Japan brushed aside criticism that aggressive easing by the Bank of Japan could trigger competitive currency devaluations, saying the central bank is trying to end nearly 20 years of deflation, not manipulate the yen.
Japanese Prime Minister Shinzo Abe's calls for aggressive action by the Bank of Japan (BOJ), which has prompted a slide in the yen, has raised alarm in Europe it could contribute to a "currency war" as other central banks adopt similar policies.
Japan may have to defend its actions at a Group of 20 meeting of financial leaders on Feb 15-16 to stem the criticism of its grand plan to revive the country's economic fortunes.
"Monetary easing is aimed at pulling Japan out of deflation quickly," Japanese Finance Minister Taro Aso told reporters on Friday. "It is not accurate at all to criticise (us) for manipulating currencies."
The BOJ this week agreed to double its inflation target to 2 percent and made an open-ended commitment to buying assets from 2014, measures intended to lift the economy out of its fourth recession since 2000 and years of deflation.
"The BOJ is pursuing powerful monetary easing without interruption," Governor Masaaki Shirakawa told a news briefing on Friday. "Japan may be facing an opportunity now to emerge from stagnation."
Still, data underlined the task ahead. Japan's consumer price index fell 0.1 percent in December from a year earlier, and even when excluding volatile food and energy, it dropped 0.2 percent.
The yen skidded to a 2 1/2 year low of 90.695 against the dollar on Friday after the consumer price data, which reinforced expectations for more monetary easing. The currency has slumped 11 percent against the dollar since early November as Abe stormed to an election victory with bold promises to end decades of stop-start growth.
After the BOJ's overhaul of its policy this week, Shirakawa offered a note of caution, saying it was important that the central bank remain flexible in guiding policy in the future.
"Long-term interest rates will spike and erode the effect of monetary easing ... if people perceive the BOJ as having shifted to a policy of recklessly buying government bonds, focusing narrow-mindedly on achieving 2 percent inflation," he said.
Minutes of the BOJ's December meeting, released on Friday, provided a hint of the possible next policy step.
They showed that a BOJ board member proposed cutting already rock-bottom interest rates on some market operations and scrapping the 0.1 percent interest the BOJ pays on excess reserves held at the central bank. The idea was voted down 8-1.
Since the global financial crisis five years ago, central banks in the United States and Britain have also engaged in aggressive monetary easing, which can help support economic growth by lowering interest rates but also tends to weaken the domestic currency.
German Chancellor Angela Merkel waded into the currency debate on Thursday, singling out Japan as a source of concern following the BOJ's moves.
"I don't want to say that I look towards Japan completely without concern at the moment," she said at the World Economic Forum in Davos. "It is known that in Germany we are of the opinion that central banks are not there to clean up political bad decisions and a lack of competitiveness."
The head of Germany's Bundesbank joined other central bankers this week in warning about the risk of competitive devaluations - countries encouraging their currencies to weaken in order to boost the attractiveness of home-grown products.
The BOJ's monetary easing would be a topic of discussion at forums like the G20, South Korean Finance Minister Bahk Jae-wan said this week.
South Korea is feeling the impact of its own rising currency and the weak yen as it competes with Japan in exports markets, such as electronics and autos. Hyundai Motor Co said the currency factors would impact its competitiveness when it reported a surprise drop in quarterly profits on Thursday.
More than 80 percent of Japanese firms are in favour of Abe's aggressive fiscal policy and calls for a weaker yen, which is sometimes referred to as "Abenomics," a Reuters Corporate Survey showed.
Respondents were also overwhelmingly in favour of aggressive monetary easing, with 79 percent of 400 companies surveyed saying a 2 percent inflation target would be effective.
Last year the yen flirted with record highs versus the dollar, which was a big concern for Tokyo given the economy's heavy reliance on exports.
"Considering the dollar was around 110 yen when the first G20 meeting was held after the Lehman Brothers crisis, the excessive yen strength is being corrected," Aso said, referring to the global financial crisis. (Additional reporting by Kaori Kaneko and Leika Kihara; Editing by Neil Fullick)
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