* First government announcement of deflation since 2006 * Government warns of risk of deflation depressing economy * In touch with BOJ, respect its independence -govt official * No specific demands for BOJ now on tackling deflation
TOKYO, Nov 20 (Reuters) - Japan's government said for the first time since 2006 that the economy was back in deflation, warning of the risk that price falls may pressure a fragile economy barely out of its worst recession in decades.
The announcement came as the Bank of Japan kept interest rates near zero and upgraded its economic assessment, despite grumblings from the government, which is worried about price falls and the risk of another recession.
"Recent price developments show that the Japanese economy is in a mild deflationary phase," the Cabinet Office said in its monthly economic report.
It said deflation posed a risk to the economy such as via a further worsening in the employment situation, a slowdown in overseas economies and swings in markets.
The government expects the BOJ to stay in close contact with it and to implement an appropriate and flexible monetary policy to help the economy return to sustainable growth with price stability, the Cabinet Office said in the report.
The OECD on Thursday urged the BOJ to keep interest rates low and buy more government bonds to help beat deflation, but the government's report did not mention how it wants the central bank to tackle deflation.
Some investors think the government may be spoiling for a fight with the BOJ to get it to buy more government bonds or even return to quantitative easing to get prices rising again.
"We are not making an announcement with such an intention. It will depend on how discussions develop in future, and we have no specific ideas in mind at the moment," said Keisuke Tsumura, parliamentary secretary of the Cabinet Office.
"As for monetary policy, we'll communicate fully with the BOJ while respecting its independence," he said.
The government maintained its assessment that although the economy has been picking up, it lacks autonomous factors and remains in a difficult situation.
In a statement on its rate decision, the BOJ said Japan's economy is picking up mainly due to policy measures taken at home and abroad, although the momentum for a self-sustaining recovery in domestic private demand remains weak.
"Expressions may differ between us and the BOJ. But there's no big gap in our view on economy and its outlook," Tsumura said.
The government said from March 2001 to June 2006 that the world's No.2 economy was in deflation, but it did not declare that deflation was beaten given the risk of continuous price falls.
The BOJ has forecast three years of core consumer price falls to March 2012, but Governor Masaaki Shirakawa has said declines in prices are unlikely to lead to downward pressure on the economy.
Tsumura said the government decided to make its announcement in view of falling core-core consumer prices, which exclude food and energy, negative nominal gross domestic product figures and huge slack in the economy as measured by the GDP gap.
Japan's economy grew at the fastest pace in more than two years in the third quarter thanks to stimulus, but cabinet ministers warned of a rocky road ahead as employment and income conditions deteriorate. (Reporting by Tetsushi Kajimoto; Editing by Hugh Lawson)