* Central bank ready to take decisive policy action -
* Says Japan economy to resume recovery mid-year
* Shrugs off criticism Tokyo manipulating yen moves
* Factory output rises in Dec, more gains seen ahead
* Average monthly earnings hit record low on cost cuts
By Leika Kihara and Kaori Kaneko
NAGASAKI/TOKYO, Japan, Jan 31 A Bank of Japan
deputy governor has flagged the strongest signal yet that it
will boldly implement more stimulus if needed to achieve the
bank's new 2 percent inflation target.
Deputy Governor Hirohide Yamaguchi shrugged off global
criticisms that the central bank was intentionally weakening the
yen by monetary easing, stressing that it never deliberately
targets exchange rates.
"I won't rule out the chance of our easing indirectly
affecting currency moves and weakening the yen. But we don't
take policy steps for the purpose of directly affecting exchange
rates," he told a news conference after meeting business
executives in Nagasaki, southern Japan, on Thursday.
His remarks came after Prime Minister Shinzo Abe waded into
the growing global debate about currency wars, saying Japan's
fiscal and monetary stimulus measures are aimed at beating
deflation, not at manipulating currency movements.
Abe's pledge of bold fiscal and monetary stimulus has helped
push down the yen, supporting the export-reliant economy and
nudging Japan's Nikkei share average to a 33-month high.
Yamaguchi, one of the central bank's two deputy governors
whose terms expire in March, offered an upbeat outlook for
Japan's economy, saying it is likely to start a moderate
recovery around mid-year, following strong signals from the
United States and China.
Factory output in December rose at the fastest pace in a
year and a half and firms expect further gains, data showed on
Thursday, raising hopes that a recovery may be already underway.
Policymakers will welcome an improvement in the economy, but
the bank will likely stay biased toward further easing as Abe
and some of his party's legislators keep up the pressure on the
central bank with threats to revise the law guaranteeing its
monetary policy independence.
NOT OFF THE HOOK
The bank this month doubled its inflation target to 2
percent and switched to an open-ended commitment to buying
assets next year, responding to intense pressure from Abe for
bolder efforts to beat deflation.
Yamaguchi said the open-ended commitment shows the bank's
resolve to maintain its ultra-easy monetary policy without
interruption, suggesting that further monetary stimulus will be
primarily through buying more financial assets, rather than
periodically resetting policy rates.
Yamaguchi said consumer inflation may reach 1 percent in the
year ending in March 2015 if the economy picks up as projected.
"Now is a good chance for Japan to end deflation," Yamaguchi
said. "We shouldn't miss this window of opportunity."
But many market players see politics as a more defining
factor in when and how frequently the bank will act, and are
already looking to a potentially new central bank leadership for
clues to how willing it will be to adopt unorthodox policy
With little room to cut already-low rates, the bank in 2010
put in place an asset-buying and lending programme as its key
monetary easing tool. Under the scheme, it has pledged to pump
101 trillion yen ($1.11 trillion) to markets by the end of this
year and switch to open-ended asset purchases from next year.
The bank next meets for a rate review on Feb. 13-14.
Japan's factory output rose 2.5 percent in December, below a
median market forecast for a 4.5 percent gain. But manufacturers
surveyed by the government expect output to increase 2.6 percent
in January and rise 2.3 percent in February, indicating a
moderate recovery in coming months.
Still, a sustained end to deflation remains distant. Wage
earners' total cash earnings fell 1.4 percent in December from a
year earlier, taking average monthly earnings in 2012 to a
record low, as companies looked to cut costs.