Deputy Bank of Japan Gov. Toshiro Muto has indicated the economy might move out of deflation later than the central bank has forecast.

“I don’t mean it is impossible (to defeat deflation) in fiscal 2005,” Muto said. “But it is very difficult to tell whether (the end of deflation) will be delayed and come about in fiscal 2006.”

Muto made the remarks on deflation, which has hobbled the economy for years, in an interview with Kyodo News on Friday.

Regarding the consumer price index — a key gauge used to determine the fate of BOJ monetary policy — Muto said year-on-year changes in the core nationwide CPI, excluding perishables, may be zero or remain in the negative column in fiscal 2005, which begins April 1, due to the effects of a reduction in NTT’s land-line telephone subscription fee.

Nine members of the bank’s Policy Board forecast in their Oct. 29 biannual report that the core nationwide CPI will move in a range of minus 0.1 percent to plus 0.3 percent in fiscal 2005 from the previous year, with the median projection coming to plus 0.1 percent.

The central bank maintained the projection when it released an interim review of the report last week.

The central bank has said it will keep the current ultra-loose policy until year-on-year changes in the CPI stabilize above zero.

“We will continue to maintain the current quantitative credit-easing policy,” Muto said.

The current ultra-easy policy has been in place since March 2001. Muto’s view on the CPI suggested that the central bank may stick to the current monetary policy until fiscal 2006 or even later.

On the economic outlook, Muto said the economy will probably return to a recovery path by spring or summer from the current “pause” in growth.

“I believe the economy will recover in the spring or shortly thereafter, but a possible delay in adjustments by the information technology-related sector and an uptrend in crude oil prices are risk factors,” he said.

Specifically, Muto said the economy will be able to post around 1.5 percent growth in fiscal 2005, which is roughly in line with the central bank’s projection.

But economic growth in fiscal 2004 is expected to fall slightly below the initial forecast of around 2.5 percent, Muto said.

Regarding relations with the government, Muto basically endorsed the government’s stance of pushing ahead with fiscal reconstruction.

“Although the fiscal authority should not be indifferent to the economy, I don’t feel discomfort with the direction (of government policy),” Muto said.

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