TOKYO Japan's finance minister said he would like to see price growth of 1 percent on Tuesday and urged the Bank of Japan to cooperate in beating deflation, putting fresh pressure on the central bank for more action to support a fragile economy.
BOJ Governor Masaaki Shirakawa said the central bank was willing to cooperate, but he offered few clues on what it would do beyond keeping monetary conditions very easy.
"I personally would like to see growth of around 1 percent (in the consumer price index), or perhaps even a little more," Naoto Kan told a lower house budget committee.
"I think the BOJ shares the government's view that this is a desirable policy goal," he said, adding that how best to achieve the goal was up to the central bank to decide.
Kan's view on prices is roughly in line with that of the BOJ, which defines price stability as annual consumer inflation of 2 percent or below and around 1 percent.
"I think the government and the BOJ share the goal and there's no disagreement on a fight against deflation. But there's little the BOJ can do given its view that quantitative easing didn't achieve anything," said David Cohen, director of Asian economic forecasting at Action Economics in Singapore.
"Frankly I think their argument is persuasive and all they can do is to keep interest rates at zero."
The central bank clarified its definition of price stability in December to say it would not tolerate zero inflation, let alone price falls, in its most aggressive statement on deflation since it ended quantitative easing in 2006.
Japan has been mired for nearly a decade in deflation, which hurts the economy as households delay spending due to hopes that prices will fall more.
The only time Japan saw inflation of above 1 percent in the past decade was in 2008, when core CPI rose 1.5 percent due almost entirely to a spike in the cost of energy and commodities.
RULES OUT QE
The BOJ is seen likely to keep interest rates at 0.1 percent and hold off on any new initiatives at a rate review ending on Thursday, as it expects Japan to avoid another recession despite a likely slowdown early this year.
The central bank does, however, appear to be ready to ease policy again in the future if market shocks, such as a sharp rise in the yen or a heavy tumble in Tokyo shares, threaten a fragile economic recovery.
Shirakawa, addressing the same budget committee as Kan, repeated that the BOJ would keep monetary conditions very easy and was always ready to provide liquidity when necessary.
"We are serious about ending deflation. It will take time and it's not something the BOJ alone can achieve. But we will be doing all we can," he said.
Shirakawa effectively ruled out any return to quantitative easing, however, a policy under which the BOJ flooded markets with excess cash for five years from 2001 in a bid to end an earlier bout of deflation.
Quantitative easing was effective in ensuring financial stability but it had only a limited effect in pushing up prices, he said.
Japan's economy grew faster than expected in the fourth quarter due to a stimulus-fueled rebound in domestic demand and corporate investment.
But markets focused on the record 3 percent annual fall in the GDP deflator, a broad gauge of price trends, as a sign that the gap between supply and demand was pushing Japan deeper into deflation.
"Deflation is unlikely to result in immediate easing, but it will keep up the pressure on the BOJ to continue with an easy monetary policy," said Takafumi Yamawaki, a senior rates strategist at BNP Paribas Securities.
The BOJ has forecast deflation will last until early 2012 but expects price falls to narrow as Japan's economy recovers with support from exports to its fast-growing Asian neighbors.
An exit from deflation may be delayed, however, unless the economic recovery is sustained long enough to boost household and corporate spending.
Core CPI, which excludes volatile fresh food prices, fell from a year earlier for the 10th straight month in December. The so-called "core-core" CPI, which also strips out energy costs and is the narrowest measure of consumer inflation, fell at the fastest pace on record.
Haruhiko Kuroda, the head of the Asian Development Bank, joined Kan in urging the BOJ to work out a solution for persistent price falls in a newspaper interview.
The BOJ is virtually alone in expanding monetary easing.
Federal Reserve Chairman Ben Bernanke has laid out the U.S. central bank's plan to withdraw its extraordinary stimulus measures, while the European Central Bank is due to decide in March how it will handle the unwinding of emergency lending measures.
(Additional reporting by Rie Ishiguro and Hideyuki Sano, writing by Leika Kihara; Editing by Michael Watson)