BOJ may need to do more vs deflation: report

The finance minister, known as one of the most vocal cabinet critics of the BOJ, told the newspaper in an interview that Japan must overcome deflation sooner than in five or 10 years' time, the Nikkei said.

The government and the BOJ agree that Japan needs to escape deflation, Kan was quoted as saying.

Unfortunately, deflation is not ending. Efforts on monetary policy may be needed in some parts, he told the Nikkei

He also said the government would need an extra 6 trillion yen ($66.5 billion) to finance social security costs in the fiscal year from April 2011, adding to concerns about Japan's bulging public debt.

Kan also did not rule out reviewing the ruling Democratic Party's campaign pledges to rein in spending, the newspaper said.

Japan's narrowest measure of consumer prices fell at a record pace in December due to persistently weak domestic demand. [ID:nTOE60R091] Deflation hurts the economy as households hold back on spending in the hope of further price falls, causing a vicious cycle of expectations of price declines and weak demand.

Kan on Friday urged the BOJ to align its policy with the deeply indebted government's efforts to fight deflation, maintaining pressure on it for possible monetary easing or even more government bond buying.

Prime Minister Yukio Hatoyama's government, which faces an upper house election in mid-2010, has little room to boost spending further as the national debt is now almost twice as big as the country's annual gross domestic product.

Credit ratings agency Standard and Poor's last week warned that it may cut the country's rating.

Kan said the government was likely to face the 6 trillion yen revenue shortfall in 2011/12 to pay out twice the amount of child allowances as in the previous year and to finance growing pension and other social security costs.

While the budget hole can be plugged either by cutting spending, raising tax or increasing new bond issuance, Kan stressed that he intends to overhaul special accounts some see as a hotbed of wasteful spending, the Nikkei said.

Analysts say the BOJ may be urged to take further easing steps such as extending the fund-supply operation it introduced in December or increasing its monthly buying of government bonds.

The BOJ has been hesitant to increase its bond buying, arguing that doing so would give markets the impression the bank is underwriting public debt.

(Reporting by Leika Kihara and Rie Ishiguro; Editing by Hugh Lawson)