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Japan's government upgraded its assessment of the economy on Monday for the first time in eight months, but reiterated that deflation posed a risk and called on the Bank of Japan for further economic support. The government has said since July last year that the economy was showing "signs of picking up" or just "picking up", but it added the word "steadily" in its monthly report to suggest a modest upgrade in its view.
The government said it will work with the BoJ to beat deflation and ensure an economic recovery, maintaining pressure on the central bank to loosen policy at a two-day policy review ending on Wednesday. "The upgrade of the government's economic view does not mean Japan is getting closer to overcoming deflation. We discuss the two issues on a different level," Keisuke Tsumura, a parliamentary secretary of the Cabinet Office in charge of compiling the report, told a news conference.
Consumer prices excluding food and energy costs, the narrowest measure in Japan that is similar to the core index used in the United States, fell from a year earlier for the 13th straight month in January. Finance Minister Naoto Kan says he wants an end to deflation this year and that inflation of 1 percent is desirable. The BoJ, which sees deflation lasting a few more years, is leaning towards easing policy this week by extending or expanding a three-month bank lending operation, sources have told Reuters.
The government's efforts to push the BoJ are designed not just to stimulate the economy, a government source said, but to boost public expectations that prices will start rising soon, which it sees as a key factor in beating deflation.Top government spokesman Hirofumi Hirano on Monday attributed the decline in ratings partly to the weakness in the economy.

Copyright Reuters, 2010

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