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Bank of Japan Gov. Masaru Hayami urged the government Thursday to initiate concrete structural reforms to stamp out deflation, reflecting the central bank’s concern about the slow pace of reforms as Diet proceedings stall amid political scandals.

“Ending deflation will be possible only through the return of the economy to sustainable economic growth,” Hayami said in his opening address at a quarterly BOJ branch manager meeting. “To achieve this, pushing forward concrete structural reforms in taxation and deregulation and stimulating private-sector demand are absolutely necessary.”

Hayami said the economy continues to deteriorate, although exports and inventories are now a weaker drag on the economy.

The BOJ last month raised its economic assessment for the first time in 20 months, saying exports have stopped falling, which should help end a yearlong slide in factory production.

“The BOJ is determined to do its utmost to end deflation, and is committed to maintaining market stability and the permeation of monetary-easing effects by providing ample liquidity,” he said.

To fight deflation, or continually falling prices, the BOJ has kept the economy awash in money, last week pumping as much as 27.7 trillion yen into private-sector banks’ current accounts held at the central bank. Prices continue to fall, however, with the consumer price index falling for the 30th consecutive month in February.

Managers of 33 branch offices nationwide and officers stationed at BOJ offices in London, New York and Hong Kong participated.

Reforms opposed

Senior policymakers from the three ruling parties on Thursday urged a key advisory panel to Prime Minister Junichiro Koizumi to freeze talks on scrapping government-backed lending institutions that have supplied credit to small and midsize firms.

Such institutions are often described as prime examples of wasteful spending.

The policymakers from the Liberal Democratic Party, New Komeito and the New Conservative Party made the request in a meeting at a Tokyo hotel with Economic and Fiscal Policy Minister Heizo Takenaka and other members of the Council on Economic and Fiscal Policy, which is led by Koizumi, participants said.

Koizumi and Takenaka have been trying to devise plans to either abolish or privatize several of the government-backed lenders, including Small Business Finance Corp.

A coalition policymaker was quoted as telling Takenaka and others at the meeting, “The roles of government-backed lending institutions are important” in cushioning the impact of private lenders’ reluctance to lend to small companies.

Taro Aso, chairman of the LDP’s Policy Research Council, told the council members, “Government-backed lending institutions are doing their utmost amid this (harsh) economic situation.

“If the council tells them that (the government) is planning to abolish them, it would put them on shaky ground,” Aso was quoted as as saying. “We want you to freeze such talks.”

But the participants quoted one council member as saying, “We have been instructed (by Koizumi) to review” the government-backed lending institutions.

Bank of Japan data show that the balance of lending by Japan’s bad-loan-ridden banks in February fell 4.6 percent from a year earlier to 437.32 trillion yen, down 55.70 trillion yen from the 1997 peak of 493.02 trillion yen.

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