TOKYO (MNI) – Japan’s economy is showing clearer signs that its
improvement will be sustainable but the Bank of Japan will continue
fighting deflation with its very stimulative credit policy, a senior
BOJ official said in parliamentary testimony on Friday.

“The effects of the accommodative monetary policy are increasing
and have contributed to preventing business sentiment from worsening,”
Hiroshi Nakaso, one of the six executive directors supporting the
governor, told the Lower House Financial Affairs Committee.

Nakaso, who oversees monetary policy planning, noted the BOJ’s
baseline scenario that improvements in the corporate sector originating
from exports are likely to spill over to the household sector and that
the growth rate of the economy is expected to rise gradually.

Regarding prices, Nakaso said, “The year-on-year declines in the
consumer price index are likely to moderate in the coming months. If the
current movements continue, we can say Japan’s economy will return to a
sustainable economic recovery path under price stability.”

On monetary policy, Nakaso repeated the pledge made by BOJ Governor
Masaaki Shirakawa on Wednesday that the BOJ will keep the practically
zero overnight interest rate and continue to inject ample liquidity
into the banking system.

Nakaso also repeated that overcoming deflation remains an important
issue for Japan.

Finance Minister Naoto Kan told the same committee: “Firms are
reluctant to borrow money, so the government may have to use tax money
and invest in areas that promote economic growth.”

He also said that policy coordination between the government and
the BOJ is going well in terms of joint efforts to guide the country out
of deflation.

At a routine meeting this afternoon between Prime Minister Yukio
Hatoyama and Shirakawa, the government wishes to have “frank exchanges
of views” with BOJ officials, said Kan.

Kan and BOJ Deputy Governor Hirohide Yamaguchi are expected to
attend the meeting.

Meanwhile, Financial Services Minister Shizuka Kamei told the
committee that the current financial environment is “abnormal” because
the BOJ has been injecting massive liquidity into financial markets but
firms are cautious about borrowing, which has prompted some excess funds
to move overseas.

He has urged the government to keep supporting the economy with an
supplementary budget for the new fiscal year that began on April 1.

tokyo@marketnews.com
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