BoJ's Kuroda expects ECB to act if deflation threat appears -Corriere della Sera

MILAN Mon Aug 25, 2014 4:04am EDT

MILAN Aug 25 (Reuters) - Bank of Japan Governor Haruhiko Kuroda does not expect the euro area to slip into deflation but is confident the European Central Bank will act to stave off such a threat should it materialise, an Italian newspaper quoted him as saying.

Kuroda, in an interview with Corriere della Sera, said that his main worry was the Ukraine crisis, which has strained the West's relations with Russia and triggered trade sanctions that are hurting already-fragile economies in Europe and Russia.

The currency bloc, however, is unlikely to fall into a spiral of falling prices as long-term inflation expectations are still positive and the region's economy is gradually recovering, albeit at a very slow pace, Kuroda said in the interview, published on Monday.

"That said, I'm convinced that (ECB President) Mario Draghi will do all that is necessary to prevent such a danger if and when there will be a serious risk of deflation in Europe," he said.

Euro zone inflation was 0.4 percent in July, the weakest level since October 2009 and well below the ECB's target of below but close to 2 percent.

Easing inflation and a sluggish economy have raised concerns that the euro zone risks slipping into the sort of deflationary spiral of falling wages and demand that held back Japan's economy for more than a decade.

In his boldest comments to date, Draghi said on Friday that the ECB would use all available tools against too-low inflation if a package of measures adopted in June failed to boost demand.

Kuroda said Japan's experience proved how damaging deflation was and added the Bank of Japan (BoJ) would extend its quantitative easing programme even beyond the fiscal year starting in April 2015 if inflation failed to reach a 2 percent target by then.

"With Japan's inflation at 1.3 percent today, we're half-way there," Kuroda said.

The BoJ deployed a large-scale monetary stimulus in April, pledging to double its money base through asset purchases. Kuroda said the yen had weakened since then but was still too strong against the dollar and the euro compared to 2007 levels.

He said Japan's economy was recovering in the current quarter after a slump in April-June driven by a sales tax increase in April, which pushed consumers to bring forward purchases ahead of the tax rise.

"Consumption is back to normal levels now and for the July-September quarter we expect a recovery in GDP. So the government will go ahead with a new sales tax increase in October." (Reporting by Valentina Za; Editing by Susan Fenton)

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