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UPDATE 2-BOJ's Nishimura sees bright signs on deflation

(For more stories on the Japanese economy, click [ID:nECONJP])

* “Beams of light through cloud of deflation” - Nishimura

* Nishimura: 1-year lag until economic trends affect prices

* Says Japan’s economy will continue to recover

* Ruling party officials want 2 pct inflation

* Analyst: BOJ try to bring price view closer to govt’s (Adds comments at news conference)

By Rie Ishiguro

SENDAI, Japan, April 21 (Reuters) - There are positive signs Japan will eventually escape deflation, a deputy governor of the Bank of Japan said, but he stopped short of endorsing inflation targeting as sought by some ruling party officials.

Kiyohiko Nishimura also gave an upbeat take on the economy, reinforcing the view that the bank will upgrade its economic forecast in a key report due on April 30.

“Some beams of light are starting to break through a thick cloud of deflation,” Nishimura said in a speech to business leaders in Sendai in northeast Japan.

More than a hundred ruling party lawmakers have called for the government to set an inflation target of 2 percent that the BOJ should work towards, and Finance Minister Naoto Kan said on Tuesday that the idea was worth looking at. [ID:nTOE63J033]

Nishimura stopped short of endorsing inflation targeting, although one analyst said the BOJ may try to align its view on prices more with that of the government.

“I suspect the BOJ could change the way it publishes its views. As the finance minister is saying he wants 1 to 2 percent inflation, the BOJ may try to make its price view closer to Kan’s,” said Naomi Hasegawa, senior strategist at Mitsubishi UFJ Securities.

Nishimura said it was the bank’s job to refine its policy framework based on its understanding of long-term price stability.

The BOJ does not have a formal price target, and instead it states its board members’ understanding of long-term price stability, which currently ranges from an inflation rate of above zero to 2 percent, centring on a 1 percent rise.

Under inflation targeting, a central bank guides interest rates to achieve a predetermined rise in consumer prices over a certain period. A central bank without a target also tries to control prices but its desired level of inflation is less explicit.

BOJ Governor Masaaki Shirakawa has said that this is better than an inflation target because it means the bank is not easily swayed by short-term price fluctuations.

Nishimura said the economy had been improving since last spring and this was expected to spill over to prices from now on.

“There’s about a one-year lag until changes in the economy affect the inflation rate,” he said.

The BOJ will issue its twice-yearly outlook report on the economy on April 30, which forms a basis for its monetary policy decisions.

It may lift its consumer price forecast for the year to March 2012 to zero change or even a slight rise from a 0.2 percent drop forecast three months ago, sources have said. [ID:nTOE63C026]

But positive growth in the consumer price index alone may not be enough to satisfy the government. Kan reiterated on Tuesday his desire for a 1 to 2 percent rise in prices.

The Democratic Party-led government has influenced BOJ monetary policy before, and should Kan warm further to inflation targeting, that could lead to more monetary easing.

Analysts said the upbeat remarks from Nishimura and Shirakawa recently should not be taken as signs of a change in central bank policy.

“Further easing is unlikely this month or next, but the BOJ will continue to seek the next step on further easing given a policy accord with the government to beat deflation,” said Hirokata Kusaba, a senior economist at Mizuho Research Institute.

Nishimura, seen as a policy dove as he has mostly toed the bank’s official line on policy, said the BOJ will keep monetary policy very easy.

“The economy is likely to continue to pick up, and corporate profitability is expected to improve further ... Monetary easing is likely to be more effective from now on,” he said. (Editing by Hugh Lawson)

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