December 18, 2012 / 2:41 AM / 5 years ago

UPDATE 1-BOJ to mull setting 2 pct inflation target by Jan -sources

* BOJ, govt may issue joint statement on higher price goal

* BOJ may clarify it eyes 2 pct inflation in long run

* BOJ Shirakawa likely reluctant to set higher price goal

By Leika Kihara and Yoshifumi Takemoto

TOKYO, Dec 18 (Reuters) - The Bank of Japan will consider no later than January whether to adopt a 2 percent inflation target, several sources familiar with its thinking have said, in response to calls from next Prime Minister Shinzo Abe for stronger efforts to beat deflation.

The central bank will likely ease monetary policy this week

due to looming risks to Japan's economic outlook, the sources have told Reuters, and may also start debating how to meet Abe's calls to set a higher price target in cooperation with the government.

"I've been saying all through the election campaign that I'd like to set a policy accord with the Bank of Japan," Abe said on Monday in his first news conference after a lower house election that swept his party to power.

"It was very rare for monetary policy to be the focus of attention in an election. But there was strong public support to our view. I hope the Bank of Japan takes this into account," he said, a thinly-veiled threat for imminent policy action.

Abe added that once he forms a new government on Dec. 26, he will instruct his cabinet ministers to work with the BOJ in setting 2 percent inflation as a shared price target.

That means the central bank will be under pressure to respond at its policy-setting meeting on Jan. 21-22, when it is set to cut its economic forecast for the year ending in March 2013 due to the widening pain from slowing global growth.

The BOJ now sets a 1 percent inflation target but has said this is a goal for the time being, and that it considers a range of zero to 2 percent as long-term desirable price growth.

The central bank may thus opt to clarify that after 1 percent inflation is met, it will aim for 2 percent inflation as a long-term policy goal, as a way to meet demands from Abe for more aggressive monetary stimulus.

The BOJ and the government may issue a joint statement, similar to one crafted in October between the central bank and the outgoing government led by the Democratic Party, pledging to each take measures to aim for 2 percent inflation in the long run, the sources said.

Abe's Liberal Democratic Party (LDP) surged to power in Sunday's lower house election pledging to revive the economy with big spending and "unlimited" monetary easing under a 2 percent inflation target. The party has also threatened to revise a law guaranteeing central bank independence, to give the government a stronger say in monetary policy.

Feeling the heat, the central bank is privately pondering various options, among them setting a higher inflation target and buying government bonds more aggressively.

But there is strong resistance within the BOJ on setting a 2 percent inflation target in a country that has barely seen price growth exceed 1 percent per annum in the past two decades. Japan's core consumer inflation was flat in October from a year earlier after five straight month of declines.

BOJ officials, particularly those close to the conservative Governor Masaaki Shirakawa, are wary of setting a higher price target without having any effective means of achieving it. They also fret that pumping too much money in an economy could brew seeds of future imbalances, such as sharp rises in asset prices.

The BOJ set a 1 percent inflation target in February and eased monetary policy four times so far this year via an increase in its asset-buying and lending programme, including in September and October.

But politicians like Abe have criticised the central bank for not doing enough to end grinding deflation that has plagued Japan for the past 15 years.

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