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MENAFN - AFP - 25/01/2013

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(MENAFN - AFP) Japan's top central banker on Friday said the new inflation target that his organisation set earlier this week would be difficult to achieve unless the country undergoes tough economic reforms.

Bank of Japan Governor Masaaki Shirakawa said the BoJ would seek one percent inflation "for the time being" just days after it had adopted a two-percent target under pressure from the government.

The two-percent goal was set on Tuesday when the BoJ also launched an open-ended easing plan to start next year, following a relentless campaign by Prime Minister Shinzo Abe for the bank to usher in more aggressive policy measures.

Abe hailed Tuesday's move, designed to beat Japan's long-running deflation, as an "epoch-making" shift in setting monetary policy.

But Shirakawa's comments Friday appeared to push back once more against the two-percent inflation target.

"For the Bank of Japan, 'price stability' means the positive area between two percent (inflation) and zero. The Bank will seek one percent for the time being," Shirakawa told the National Press Club in Tokyo on Friday.

"It will take radical efforts from...the government, central bank and the private sector in order to achieve the two-percent inflation target."

Tensions have run high between BoJ policymakers and Abe's administration, with the 58-year-old premier having openly said he would like to turf out Shirakawa, whose term ends in April, and threatening to change a law mandating the bank's independence if it does not fall into line.

The bank on Tuesday said switching from an inflation "goal" to a more explicit "target", and aiming for a two-percent inflation rate instead of the one-percent it had earlier promoted, was driven by the "importance of flexibility in the conduct of monetary policy in Japan".

However, Shirakawa and Abe, who swept to power last month in landslide elections, butted heads on policy matters and the move was widely viewed as the under-pressure BoJ bowing to political pressure.

Some economists and analysts have pointed to structural reforms of the economy as being key to solving Japan's woes, and cast doubt on the likelihood of achieving the new inflation target when the world's third-largest economy has been stuck in a deflationary rut for years.

"I would say that not even half of market players actually believe the two-percent target can really be achieved," said Tsuyoshi Ueno, a senior economist at the NLI Research Institute in Tokyo.

Others noted that the plan may be more show than substance, with London-based Capital Economics saying that the vague timeline for the BoJ's "ambitious" inflation target "makes that commitment much less bold".

"The Bank is already committed to end deflation and similar statements have been made before," it said in a note after Tuesday's announcement.

Official data on Friday showed consumer prices, excluding volatile fresh food, slipped 0.1 percent last year, marking the fourth straight annual dip in Japan's core inflation rate and underscoring its tough battle with falling prices.

Deflation is bad for the economy because it encourages consumers to put off spending in the belief their intended purchases will be cheaper in the future, softening demand and hurting producers and their own capital investment plans.

Also Friday, Shirakawa said the expectations of central banks have "risen globally more than ever".

The pressure from Tokyo has set nerves jangling among central bankers overseas, with the head of Germany's Bundesbank on Monday decrying government meddling in monetary policy, citing Japan and Hungary.

"We are witnessing disturbing abuses... where the new government is interfering massively in the affairs of the central bank, calling forcefully for a more aggressive monetary policy," Jens Weidmann said.


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