By Mayumi Otsuma and Keiko Ujikane
(Bloomberg) – The Bank of Japan will probably refrain from easing monetary policy further at a board meeting this week because the recovery remains intact even as deflation intensifies, economists said.
A report yesterday showed that economic growth accelerated last quarter, prompting Finance Minister Naoto Kan to say risks of another recession are receding. Still, the same data showed a broad measure of prices fell the most in more than half a century, and economists including Takahide Kiuchi say the bank may be compelled to add credit to the economy later this year.
“Deflation is deepening, so the government may resume pressure on the BOJ to fight deflation in the months ahead,” said Kiuchi, chief economist at Nomura Securities Co. in Tokyo. “There’s a chance for a further action by the BOJ if the yen strengthens and stocks slump again.”
Gross domestic product rose at an annual 4.6 percent pace in the three months ended Dec. 31 after failing to expand in the previous quarter, the Cabinet Office said yesterday. Exports led the expansion, aided by a global recovery that prompted manufacturers from Panasonic Corp. to Nissan Motor Co. to raise their profit forecasts this month.

GDP Deflator

Even so, the revival from Japan’s worst postwar recession hasn’t spread fast enough to spur prices. Yesterday’s report showed the GDP deflator tumbled 3 percent, the biggest drop since records began in 1955, and the domestic demand deflator, a gauge that excludes imports, slid 2.9 percent.
“Overcoming deflation is a very significant challenge,” Kan said in parliament today. “I want to bring Japan back onto a sustainable growth path and to end deflation, of course with support from the Bank of Japan.”
Shirakawa told lawmakers at the same hearing that the central bank is prepared to provide more liquidity should financial markets become volatile.
“It takes time to beat deflation, though we are making a serious attempt to overcome it,” the governor said. Sustained price declines “can’t be eradicated only by the central bank, but we will continue steadily to do what we can.”

Declining Popularity

Prime Minister Yukio Hatoyama is trying to maintain a recovery from Japan’s worst postwar recession as his popularity declines ahead of a July upper house election. With the government’s ability to provide further stimulus limited by the world’s largest debt burden, it may turn to the Bank of Japan to do more to spur the economy, said Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management Co. in Tokyo.
“The government will likely put pressure on the BOJ to take more action as it’s always over-relying on the BOJ when it’s in trouble,” Muto said.
The Bank of Japan unveiled a 10 trillion yen lending facility for commercial banks in December after the yen surged to a 14-year high of 84.83 against the dollar and government ministers including Kan urged it to do more to fight deflation.
The currency has weakened more than 3 percent since the Dec. 1 move, trading at 89.97 per dollar at 1:34 p.m. in Tokyo. The Nikkei 225 Stock Average rose 0.4 percent and has gained 5 percent since the liquidity steps were announced.

Credit Program

Hiromichi Shirakawa, a former BOJ official and now chief economist at Credit Suisse Group in Tokyo, is one of the two survey participants who said the central bank may increase the credit program this week. Other options include expanding its monthly purchases of government bonds from 1.8 trillion yen ($90 billion).
Muto said the government may compile a “modest” stimulus package before the election using funds set aside for emergency spending in the budget and will avoid selling more bonds because concerns over sovereign debt are growing globally.
Bank of Japan policy makers have started to call on the government to act to contain fiscal expansion. Board member Seiji Nakamura said in a speech on Feb. 4 that concerns about the quality of public debt in European countries shouldn’t be regarded as “a burning house on the other side of the river.”
Standard & Poor’s last month warned that it may cut Japan’s AA debt rating unless the country develops a plan to contain the deficit.

Sales Tax

Kan said this week that the government plans to start debating taxation changes, signaling it may consider raising the 5 percent sales tax to help repair the country’s finances. He aims to release a fiscal strategy by June.
“Japan’s fiscal deterioration is becoming more evident, and the government must map out its plan for rehabilitation as soon as possible,” said Teizo Taya, a former central bank board member who now advises the Daiwa Institute of Research.
Bank of Japan officials already expect the recovery will slow in the first half of the year. Deputy Governor Hirohide Yamaguchi told lawmakers last week that the economy will remain “severe” through mid-2010.
“The economy’s deceleration alone won’t likely prompt the central bank to take monetary-easing action,” said Seiji Shiraishi, chief economist at HSBC Securities Japan Ltd. in Tokyo. Shiraishi said the bank may add more money to the banking system if a surge in the yen threatens to cripple the export-led recovery.

–With assistance from Toru Fujioka in Tokyo. Editors: Russell Ward, Lily Nonomiya

To contact the reporters on this story: Mayumi Otsuma in Tokyo +81-3-3201-8966 or at motsuma@bloomberg.net; Keiko Ujikane in Tokyo at +81-3-3201-7311 or kujikane@bloomberg.net

To contact the editor responsible for this story: Chris Anstey at +81-3-3201-7553 canstey@bloomberg.net

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