Under pressure, BOJ may edge near Fed-style price target

TOKYO (Reuters) - Pressure is mounting on the Bank of Japan to set a Fed-style explicit inflation target, and the central bank may respond by using stronger language to describe its commitment to beating deflation in a two-day rate review that kicks off on Monday.

Further monetary easing, via an increase in asset purchases, also cannot be ruled out with financial markets vulnerable to any sudden worsening of developments in Europe's debt crisis.

Data released on Monday showed Japan's economy shrank more than expected in October-December, underscoring the pain from slowing global growth and a strong yen.

But with Sunday's approval of a key austerity bill by Greek lawmakers and the yen pulling back from record highs, the BOJ may find it hard to justify loosening policy now and instead debate setting a clearer price goal in response to growing political calls for one.

"The BOJ is likely to stand pat on monetary policy for the time being barring a sudden rise in the yen, as it has already taken into account the economy's underlying weakness," Yoshiki Shinke, senior economist at Dai-ichi Life Research Institute, said after the data.

The central bank may tweak its wording to clarify that it will aim to achieve consumer inflation of 1 percent, or signal that a major revision to its price commitment is under way, analysts say.

"At this meeting, the BOJ may clarify its phrase defining the median (desirable consumer inflation) at 1 percent so that it becomes close to a price goal," said Takahide Kiuchi, chief economist at Nomura Securities in Tokyo.

While that would hardly be enough to please politicians demanding bolder action, it is probably the least it can do for now to prevent them from following through on their threat to revise the BOJ law to give the government more room to intervene in monetary policy, analysts say.

BOJ Governor Masaaki Shirakawa was grilled in parliament last week by lawmakers who may face a snap election, and the government is worried that growth may not be robust enough to stomach tax increases proposed to fix stretched public finances.

Economics Minister Motohisa Furukawa weighed in, saying on Sunday he hopes the central bank examines a way to make its price commitment easier to understand. He repeated his calls for more action on Monday, a rare move by a cabinet minister on the day the bank's board was meeting.

"It's clear that the government and the BOJ need to work even harder than before to put a stop to deflation, and I expect the BOJ to take firm monetary policy measures when needed," he told a news conference.

MORE EASING?

The BOJ pledges to keep ultra-low interest rates until an end to deflation is in sight, and defines desirable long-term price growth as consumer inflation of 2 percent or lower with the median for the nine-member board at 1 percent.

It has described this as the board's "understanding" of desirable inflation rather than an explicit price target, for fear of binding its hands on policy.

But this has drawn criticism from lawmakers as too vague compared with the Fed's 2 percent inflation target and its extended commitment to near-zero rates announced last month.

The BOJ is due to review the loose price goal in April as a regular practice. It may move forward this schedule in the face of political pressure. But the consensus-favoring board may lack time to agree on Tuesday to any substantial changes such as setting a higher price target or a deadline to achieve it.

That means it may try to appease lawmakers by modifying its language, which could disappoint markets and further heighten political calls for bolder action.

Growing political pressure amid signs of economic weakness means that even if the BOJ refrains from action on Tuesday, it may loosen policy in March.

The BOJ has expressed its readiness to act if Europe's debt crisis, slowing overseas growth and a strong yen threatened Japan's fragile economic recovery.

But with rates virtually at zero, central bankers also want to save ammunition in case Europe's crisis flares up again, spilling over to global credit and financial markets.

If the BOJ were to ease policy, the most likely step would be to further top up its 55 trillion yen ($708 billion)asset buying and lending scheme, under which it buys government and private debt and lends cheap funds against various types of collateral.

(Additional reporting by Stanley White; Editing by Tomasz Janowski and Joseph Radford)

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Obama's election-year budget to target rich

WASHINGTON (Reuters) - President Barack Obama will propose an election-year budget on Monday that raises taxes on millionaires and seeks billions of dollars for job-creating infrastructure projects, drawing a populist battle line with his Republican opponents.

Obama's fiscal 2013 budget proposal to Congress will defer significant cuts in the deficit until the economy is securely back on track, a priority as he seeks re-election in November, while outlining measures to shrink that funding gap over time.

"I think there is pretty broad agreement that the time for austerity is not today," new White House chief of staff Jack Lew, the president's budget director until a few weeks ago, told NBC's "Meet the Press" on Sunday.

Obama's budget is likely to be declared a non-starter by Republicans, in control of the U.S. House of Representatives, who want to paint the president as a tax-and-spend liberal. They warn that tax hikes will kill jobs while doing nothing to halt the climb in the crushing level of national debt.

"We're taking responsibility for dealing with the drivers of our debt," said Republican Paul Ryan, chairman of the House Budget Committee. "Unfortunately, the president and his party's leaders - they're not a part of this conversation," he told ABC News' "This Week" on Sunday.

The budget grants Obama one of his biggest platforms before the November 6 presidential election to lay out his vision for America's future, casting Republicans as the party of the rich as he tries to convince voters he would do more to protect their +interests.

Polls consistently show that even as the economy has demonstrated surprising strength in recent weeks, Americans are still unsure of Obama's economic stewardship, a major problem for him as he seeks to persuade them to give him a second White House term.

BUFFETT RULE

Obama will repeat a demand for millionaires to pay a minimum tax rate of 30 percent, named after billionaire investor Warren Buffett, and identify $4 trillion in deficit reduction over 10 years that broadly mirrors a plan he laid out in September.

The budget projects a deficit of $901 billion in 2013, representing 5.5 percent of gross domestic product (GDP), down from $1.33 trillion, or 8.5 percent of GDP this year, White House officials say.

Obama pledged back in 2009 to have cut the deficit in half by next year, but his budget does not anticipate getting it back under 3 percent of GDP until 2018 -- satisfying credit rating agencies and investors who view this as a key threshold to stabilize the growth in national debt as a proportion of output.

Obama's deficit projections are based on growth forecasts that will be released along with the rest of the budget at 1115 EDT (1615 GMT).

The White House has already declared its budget prediction of an 8.9 percent 2012 unemployment as "stale," after an improving labor market lowered unemployment to 8.3 percent in January.

That encouraging sign for the recovery implies that deficit projections could be revised lower if growth, and accompanying tax revenues, also turn out to be stronger than expected.

However, Republicans say Obama uses gimmicks to massage the deficit numbers, pointing to savings from winding down wars in Iraq and Afghanistan, which they complain amounts to counting funds that were never going to be spent.

The president will propose using half of the money from ending Americas' two foreign wars to subsidize investment in infrastructure as part of his request for over $800 billion in multi-year spending on job creation and transportation.

This includes tax breaks for companies and individuals that would be worth more than $300 billion in 2012 if passed into law, potentially delivering U.S. growth an additional fiscal stimulus as Obama campaigns around the country for re-election.

One of the biggest boosts would come from extending a payroll tax cut for 160 million Americans for all of 2012, which expires on February 29 unless Congress acts. The White House estimates this could add a percentage point to 2012 GDP.

Overall, the budget proposes raising $1.5 trillion over a decade through higher taxes, with around half coming from allowing tax breaks for families earning more than $250,000 a year to expire at the end of 2012 - a longstanding Obama goal.

(Editing by Cynthia Osterman)

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