* Shirakawa: rules out inflation targeting
* Says current framework is best
* BOJ keeps policy on hold, no new easing step
* Maintains economic assessment, see deflation easing (Adds comments from Shirakawa)
By Rie Ishiguro and Tetsushi Kajimoto
TOKYO, Feb 18 (Reuters) - The Bank of Japan chief fended off renewed political pressure to do more to fight deflation, saying the government should respect the central bank's independence if it wants to avoid unsettling financial markets.
Finance Minister Naoto Kan turned the heat up on the central bank this week, saying inflation of 1 percent was the minimum needed for price stability, a goal that has eluded Japan in nine of the past 10 years.
But BOJ Governor Masaaki Shirakawa on Thursday ruled out adopting an inflation-targeting policy, saying focusing on short-term price pressures could prevent sustainble growth.
He also shrugged off calls from some policymakers to step up its government bond buying operation aimed at lowering market rates.
"Monetary policy should aim at achieving sustainable economic growth with price stability. It's important that the government respects this, in order to ensure market trust," Shirakawa told a news conference.
The financial markets showed little reaction to Shirakawa's comments.
The government, hobbled by a ballooning fiscal debt, has been leaning on the BOJ to support the fragile economy even as most other major central banks mull rolling back stimulus steps put in place during the global crisis.
The central bank has said it is committed to fighting deflation, but its policy statement issued earlier in the day as well as Shirakawa's comments shed little light on what it could do in the future.
"Its reserved stance towards an inflation target suggests that the BOJ's opinion may not exactly be the government's view," said Takafumi Yamawaki, senior interest rates strategist at BNP Paribas Securities.
"Whether the BOJ and the government stay on a similar wavelength will be one focus point going forward."
EYE ON YEN
Many analysts expect the BOJ could pump more money into the banking system or offer cheap longer-term funds to bring down longer-dated interest rates such six-month rates, particularly if the yen rises further and threaten to deepen deflation.
Core consumer prices fell 1.3 percent from a year earlier in December, the 10th month of decline, while the GDP deflator, a broad gauge of price trends, sank to a record 3 percent fall in the fourth quarter, underlining the growing deflationary pressure in the world's second-largest economy.
Kan's call for a minimum of 1 percent inflation was basically in line with the central bank's view of price stability as annual inflation of 2 percent or less, with 1 percent as an ideal level.
But the mere mention by Kan of such a goal in effect raised pressure on the central bank, which yielded to government criticism by calling an emergency meeting in December to announce it was pumping more cash into the banking system.
With interest rates at 0.1 percent, the BOJ has few conventional weapons left in its policy arsenal.
The next BOJ action may be to extend the duration or increase amount of its three-month 10 trillion yen funding operation it introduced on Dec. 1, analysts say. It could also buy more government bonds.
The Japanese yield curve has steepened recently as expectations the BOJ could ease monetary policy further kept shorter-dated yields low, while longer-dated maturities suffer from concern about Japan's fiscal condition.
The yield spread between five- and 20-year bonds hit a decade high on Tuesday after Kan's comments on inflation.
BOJ officials have countered criticism that it could be doing more by arguing that the economy will continue recovering as it projected last month without more policy easing.
The BOJ stuck to its economic assessment on Thursday, saying deflation will gradually ease and the recovery will continue.
Kan acknowledged after the GDP data that the risk of a second recession was receding. The government fears that another downturn after the one in in 2008-2009 -- the longest contraction since World War Two -- would undermine its chances in upper house elections this year. ($1=91.20 Yen) (Additional reporting by Rika Otsuka; Writing by Hideyuki Sano; Editing by Kazunori Takada)