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TOKYO, June 29 (Reuters) - Bank of Japan Deputy Governor Hirohide Yamaguchi said on Monday that Japan is not in a deflationary spiral and the central bank expects falls in consumer prices to moderate after the summer.
Yamaguchi's comments came after data showed on Friday consumer prices fell a record 1.1 percent in the year to May, with clear evidence that demand was evaporating.
"We expect falls in core consumer prices to shrink after summer. We judge that Japan is not in spiralling deflation," Yamaguchi told a committee of parliament's upper house.
The central bank is forecasting two years of deflation, so declining prices alone are unlikely to push it back into full-blown quantitative easing, which in Japan involved flooding the banking system with cash to meet a specific monetary target.
But the bank has already been expanding its balance sheet. It has ramped up its buying of government bonds twice since December, effectively capping bond yields and borrowing costs, as the financial crisis ripped through global markets.
Expectations that the world's no. 2 economy will start growing again after four straight quarters of contraction have prompted speculation that the central bank may start thinking about phasing out emergency steps introduced in the midst of the global financial turmoil.
But the OECD said last week the BOJ should extend its unconventional policy measures, such as corporate debt purchases and increased buying of government bonds well into next year to battle deflation. [ID:nSP477873]
Friday's data showed the so-called core-core inflation index fell 0.5 percent from a year earlier, the biggest decline in almost two years. This measure strips out both energy and food prices and is similar to the underlying inflation gauges used in Europe and North America. [ID:nT58234] (Reporting by Hideyuki Sano; Editing by Kazunori Takada)