* BOJ keeps policy on hold, upgrades economic view
* BOJ steps aimed at ensuring economic recovery -Shirakawa
* Adds BOJ not targeting forex in monetary policy
* Q4 GDP -0.1 pct vs forecast +0.1 pct in Reuters poll
* Capex, exports weigh on growth, recovery still on track
By Leika Kihara and Kaori Kaneko
TOKYO, Feb 14 Bank of Japan Governor Masaaki
Shirakawa defended the central bank's aggressive monetary
expansion, saying it was aimed at reviving the economy not at
weakening the yen, as the country came under fresh international
criticism ahead of a closely watched G20 gathering.
His comments came after data showed Japan's economy
unexpectedly contracted in the fourth quarter, failing to escape
a mild recession and playing into the hands of a government
pushing for more radical stimulus measures that could cause the
currency to weaken further.
Shirakawa said he would make that point clear to his Group
of 20 counterparts at the weekend meeting in Russia, where Japan
may face heat from some countries unhappy with the yen's recent
steep falls, such as export competitor South Korea.
"The BOJ is conducting monetary policy to achieve stability
in Japan's economy. It will continue to do so," he told a news
conference on Thursday, hours before heading for Moscow.
Expectations that Prime Minister Shinzo Abe will keep
pushing the central bank for bolder measures to beat deflation
have driven the yen down nearly 20 percent against the dollar
That has offered some relief to the export-reliant economy,
which contracted 0.1 percent in the fourth quarter but is
showing some signs of a pick-up, thanks to improving global
demand and the effect of policy stimulus.
The BOJ struck a more positive note on the economy earlier
in the day while keeping its policy on hold, after having
boosted its monetary stimulus and doubled its inflation target
to 2 percent just a month ago.
The yen's fast-paced declines, however, have stirred an
international debate over whether Japan was effectively using
money printing to steer the yen lower.
South Korea's central bank warned on Thursday that Japan's
expansionary monetary policy could affect that country's future
growth as a weak yen could undercut Korean exporters'
Japan has said the Group of Seven rich nations accepted
Tokyo's view when it declared in a statement on Tuesday that
fiscal and monetary policies would not be directed at devaluing
Shirakawa and Finance Minister Taro Aso, who will also
attend the G20 gathering, may have a tough time selling their
pitch to suspicious counterparts, as many Japanese policymakers
have until recently openly talked about the benefits of a weak
yen on Japan's exports.
Former BOJ Deputy Governor Kazumasa Iwata, who is considered
as one of the leading candidates to replace Shirakawa when he
leaves his post in March, was quoted as saying that the yen is
still overvalued from a trade perspective.
Shirakawa himself acknowledged that recent yen declines will
gradually underpin exports, helping Japan's economy resume a
moderate recovery around the middle of this year.
The dollar traded around 93.50 yen on Thursday after
hitting a 33-month high of about 94.47 yen on Monday.
NO FOREIGN BOND BUYING?
The world's third-largest economy contracted 0.1 percent in
October-December to mark the third consecutive quarter of
declines, compared with economists' forecasts for a very modest
expansion of 0.1 percent. But recent sentiment surveys and
leading indicators, such as machinery orders, have pointed to a
gradual recovery in coming months.
"There is a strong chance that the economy will grow in
January-March. China's economy is picking up and the United
States is also on solid footing," said Yuichi Kodama, chief
economist at Meiji Yasuda Life Insurance in Tokyo.
"Yen weakness has proceeded under 'Abenomics'. Corporate
sentiment has improved, which will lead to an increase in
The BOJ maintained its key policy rate at a range of zero to
0.1 percent on Thursday and held off expanding its asset buying
and lending programme, while offering a rosier view of the
economy than a month ago, saying it "appears to be bottoming
Still, markets have no doubt that Abe will keep pushing the
central bank for more in order to reflate the economy, given its
still fragile state.
However, a return to rising prices appears far off after
nearly two decades of low-grade deflation.
Shirakawa warned that wages would need to rise sustainably
for Japan to achieve the BOJ's 2 percent inflation target, which
would be a challenge in a country where companies tend to keep
wage growth slow to protect jobs.
In a rare move for a premier, Abe himself made a direct plea
to corporate executives for their cooperation in raising
salaries, which met a cool response.
Abe, who has the right to fill three top BOJ posts when
Shirakawa and his two deputies leave on March 19, is widely
expected to pick advocates of more aggressive monetary easing
than the cautious outgoing chief.
Whoever succeeds Shirakawa, however, will face the challenge
of trying to create inflation with a depleted policy arsenal.
The BOJ is already struggling to force-feed cash to markets
awash with funds, and intensifying global heat over the
weakening yen may rule out one of its few remaining options:
buying foreign bonds.
"The BOJ is expected to step up its monetary stimulus
efforts under a new governor, and an increase in long-dated
government bond purchases would be an option," said Izuru Kato,
chief economist at Totan Research in Tokyo.
"But I think it would be difficult for the BOJ to buy
foreign bonds, considering relations with the G7 and G20."