Shirakawa Says Weighs Growth, Inflation Risks Equally

By Mayumi Otsuma

July 18 (Bloomberg) -- The Bank of Japan weighs the risks that the economy may slow with the risk that inflation will accelerate equally when formulating policy, Governor Masaaki Shirakawa said.

``We don't have any pre-set direction for policy and must carefully examine both upside and downside risks,'' Shirakawa said at a business meeting in Tokyo today. ``If asked about a numerical-weight allocation, I would say that it is fifty-fifty'' growth to inflation, he said.

Shirakawa's comments contrast with some board members, according to minutes for the June 12-13 meeting published today. At last month's meeting, some members said the bank should focus more on the risk that economic growth will slow rather than the risk that inflation will accelerate.

``Shirakawa wants to emphasize the Bank of Japan's stance that policy is neutral,'' said Hiroshi Shiraishi, an economist at Lehman Brothers Holdings Inc. in Tokyo. ``The central bank will stay on hold with little risk of secondary inflation and with the outlook for growth returning to a moderate path.''

The central bank this week lowered its economic growth forecast, raised its inflation estimate and said the economy is slowing further as higher commodity prices hurt the expansion.

The governor today said rapid gains in fuel and commodity prices are crimping capital investment, eroding household incomes and hurting consumption. Still, the central bank expects that Japan's economy will return to a recovery path and can avoid ``a deep adjustment,'' Shirakawa said.

Second-Round Inflation

Central banks of major economies share the view that rates need to be raised should they observe rising risks of ``second- round inflation,'' where gains of fuel and commodity prices spread to other goods and services, Shirakawa said.

The Bank of Japan hasn't observed such effects in Japan so far, though the risk that people's inflationary expectations will change shouldn't be ruled out, the governor said.

``When the economy and prices moves in opposite directions, we need some kind of standard to judge monetary policy,'' he said. ``For this, the Bank of Japan and many other central banks focus on whether inflationary expectations are maintained as stable.''

To contact the reporter on this story: Mayumi Otsuma in Tokyo at motsuma@bloomberg.net