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Japan's new central bank, government vows to work together to boost economy, end deflation

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TOKYO - The newly installed governor of Japan's central bank said Thursday that he plans to do whatever he can to end deflation and break the economy out of the doldrums.

After a meeting with Prime Minister Shinzo Abe, Haruhiko Kuroda told reporters he had reiterated his pledge to "do everything we can to get the economy out of deflation."

Kuroda, a Finance Ministry veteran who most recently headed the Asian Development Bank, has firmly backed Abe's economic strategy including setting a 2 per cent inflation target which he says he hopes to meet within two years.

While Abe is hoping for a quick reflation of the economy, Finance Minister Taro Aso expressed doubts Thursday during questioning in parliament.

"To be honest, I'm skeptical whether (prices can rise by 2 per cent) within two years so easily," Kyodo News Service quoted Aso as saying.

Kuroda took office on Wednesday, succeeding Masaaki Shirakawa who had shown reluctance to add to Japan's massive public debt through more aggressive monetary easing. He stepped down three weeks before his five-year term was to end.

Abe and some experts view years of falling prices, which tend to discourage corporate investment, as a key reason for Japan's economic stagnation over the past two decades. However there are doubts about how much looser monetary policy can help after years of near-zero interest rates.

In a news conference late Thursday, Kuroda was optimistic about achieving the inflation target but downplayed concerns that easing monetary policy might lead to asset price bubbles or other destabilizing trends, such as rising yields on government bonds that could strain public finances.

So far there has been no sign of a rise in prices, though other indicators have shown Japan may be emerging from recession.

"It's just the beginning of 'Abenomics.' It's all about expectations rather than results," Hugh Patrick, a professor at Columbia University's Center on Japanese Economy and Business, said at a conference Thursday.

"Now, monetary policy has to succeed. And if and when deflation is brought to an end, there will be challenges," he said.

Over recent months, the Japanese yen has weakened by about 20 per cent against the U.S. dollar, helping export manufacturers. Share prices have also rallied.

But resource-scarce Japan's costs for purchases of LNG and crude oil have soared. Japan's 777.5 billion yen ($8.1 billion) trade deficit in February was the eighth monthly deficit in a row following a record monthly deficit of 1.63 trillion yen in January.

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