Bank of Japan reiterates Japan to see 3 yrs of deflation+

TOKYO, Jan. 26 Kyodo -
The Bank of Japan on Tuesday reiterated that it projects Japan will see at
least three years of price declines through 2011 and left its key interest
unchanged at 0.1 percent in an effort to combat deflation and help the nation's
economy to recover.
In an interim review of its semiannual report on economic and price conditions
released in October, the BOJ said, however, that it is now predicting slightly
milder deflation than it thought three months earlier due mainly to the impact
of higher crude oil prices.
As for the state of the Japanese economy, the BOJ said it is moving largely in
line with its previous forecast for a moderate recovery in the first half of
fiscal 2010, and held off on new policy initiatives as widely expected.
''We fully recognize the possibility that the economy's growth pace may slow
somewhat temporarily, but we do not expect a break in the recovery trend,'' BOJ
Governor Masaaki Shirakawa said at a press conference after a two-day policy
meeting.
He added there was no change in the BOJ's stance of maintaining a very easy
monetary policy despite its latest projection of milder deflation.
The BOJ revised upward its projection for the consumer price index excluding
volatile perishable foods for fiscal 2010 from the previously projected
year-on-year fall of 0.8 percent to a decline of 0.5 percent. The central bank
also raised its CPI forecast for fiscal 2011 from a 0.4 percent fall to a 0.2
percent decline. For fiscal 2009, it maintained its projection of a 1.5 percent
drop.
The central bank said that it considers overcoming deflation and returning to a
sustainable growth path a ''critical challenge'' for the Japanese economy, and
with that in mind, it intends to maintain an ''extremely accommodative
financial environment.''
The BOJ continued to regard the nation's economy as ''picking up'' as exports
and production continued to increase on the back of improvements in overseas
economies, especially emerging economies. But momentum to support a
self-sustaining recovery in domestic private demand remains weak amid severe
employment and income conditions, it added.
The BOJ revised upward its projection for the nation's gross domestic product
for fiscal 2009 from the October forecast of a 3.2 percent contraction in real
terms to a decline of 2.5 percent.
It also raised its GDP projection for fiscal 2010 from 1.2 percent growth to a
1.3 percent expansion, while maintaining its forecast for fiscal 2011 at 2.1
percent growth.
Toshihiro Nagahama, chief economist at the Dai-ichi Life Research Institute,
said the BOJ's latest economic projection and Shirakawa's comments underscored
the central bank's growing confidence that Japan can avoid falling into a
double-dip recession.
''But this does not change the fact that Japan will remain mired in deflation
and the BOJ may need to ease its monetary grip further by the end of this
fiscal year,'' Nagahama said, referring to the government's growing pressure on
the BOJ to do more to contain deflation.
He added that the yen's appreciation could accelerate as companies repatriate
their overseas revenues before the March 31 book-closing of fiscal 2009, also
possibly raising pressure on the BOJ to take a new policy initiative.
Following the yen's abrupt surge to a 14-year high against the U.S. dollar in
late November, the BOJ introduced in December a new low-interest-rate funding
scheme for commercial banks and made it clear that the central bank would not
tolerate deflation.
BOJ chief Shirakawa said those measures ''helped to halt the deterioration of
corporate sentiment'' stemming from rising fear of deflation, a stronger yen
and lower stock prices.
With the key interest rate already near zero, there is little room for
adjusting conventional monetary policy. The most likely option that the BOJ may
take to ease its monetary grip is expanding the amount of money or the length
of time it lends under the new funding program, Nagahama said.
Under the program, the BOJ is currently offering a total of 10 trillion yen to
financial institutions in three-month loans at a fixed interest rate of 0.1
percent against such collateral as government bonds and corporate debt.
Leaving the key interest rate unchanged was decided in a unanimous vote by the
BOJ's seven policymakers. The central bank last cut its target rate for
unsecured overnight call money in December 2008, lowering the rate from 0.3
percent.
The BOJ releases long-term economic and price forecasts every April and
October, and reviews them three months later.
==Kyodo