Japan govt urged BOJ clarity on deflation response

By Leika Kihara

TOKYO (Reuters) - A government representative urged the Bank of Japan to clarify its stance on how it will tackle deflation at the bank's Oct. 30 policy-setting meeting, as the new administration piles pressure on the BOJ to act against price falls and the risk of another recession.

Tension is brewing between the new government and the central bank over how to manage the nation's fragile recovery as the world's No.2 economy faces its second bout of deflation in less than a decade.

Another government representative proposed setting up a regular forum for talks between the two sides, but BOJ Governor Masaaki Shirakawa said only that the bank would continue to closely communicate with the government, minutes of the Oct. 30 meeting showed.

"The conduct of monetary policy will ultimately be discussed and decided by the bank's policy board," Shirakawa, who chairs the board meetings, was quoted as saying.

"But we would like to continue engaging in an appropriate exchange of views with the government."

The government has been vague on what it wants the BOJ to do beyond keeping interest rates low. But analysts say the bank may eventually buy more government bonds or return to a quantitative easing policy of flooding markets with extra cash.

"The pressure on the BOJ is set to increase, so quantitative easing is an option. But the effect on the economy will be limited," said Koichi Haji, chief economist at NLI Research Institute.

At the meeting, the BOJ decided to begin withdrawing from credit markets but extended a key loan programme, after government criticism over its moves to end corporate support put in place during the global financial crisis.