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Pressure on BOJ to act mounts as deflation persists

By Tetsushi Kajimoto and Leika Kihara

TOKYO (Reuters) - Japan remains mired in deflation, price data showed on Friday, piling pressure on the central bank to deliver more stimulus next week to keep the world's third-largest economy from sliding into recession.

The fifth consecutive annual drop in core consumer prices reinforced market expectations that the Bank of Japan will boost its asset purchases, probably by 10 trillion yen ($124.74 billion), next week in response to a slew of worsening economic data.

The government also kept up the heat with Economy Minister Seiji Maehara calling for joint decisive action of the government and the central bank to support the economy.

"Central banks around the world are easing monetary policy. The BOJ itself set a 1 percent inflation goal in February but that hasn't been achieved. As price falls are continuing, I want to ask the central bank to pursue powerful monetary easing," Maehara told reporters after a cabinet meeting.

The government can send its representatives to BOJ meetings and Maehara has said he wanted to attend the one next week.

The central bank is expected to cut its growth and price projections at the October 30 policy meeting and admit that it was farther away from reaching the inflation goal than earlier thought.

Japan's core consumer prices fell 0.1 percent in the year to September, slightly less than expected, but economists said that was only due to higher energy costs and masked persistent deflationary pressures in the weakening economy.

The data follow recent statistics showing last month's exports posted their biggest annual drop since the aftermath of the 2011 earthquake while manufacturers' mood hit its lowest since early 2010, as the diplomatic row with China threatens the export-reliant economy amid the global slowdown.

"Prices have turned out weaker than the BOJ expected and the economy is slowing more than the bank anticipated, with both exports and domestic demand weakening," said Yoshimasa Maruyama, chief economist at Itochu Economic Research Institute in Tokyo.

"As such, I expect the BOJ will top up its asset-buying program by 10 trillion yen next week as it comes under pressure from the real economy as well as from politics."

For the better part of the past decade the world's third-largest economy has been caught up in the vicious circle of price declines that discourage investment and make consumers put off spending, which in turn weighs on demand and output.

The central bank set a 1 percent inflation target and eased policy by boosting its asset-buying program in February, and followed up with further stimulus in April and September.

Japan's economy outperformed most of its peers in the Group of Seven in the first half of this year, helped by solid private consumption and reconstruction spending.

But weak external demand and a strong yen have led analysts to project growth will likely stall for the rest of this year, with some anticipating Japan may fall back into recession.

A territorial row with China that set off a wave of anti-Japanese sentiment and forced several Japanese companies to cut back production and sales in their biggest export market further amplified those concerns.

In an effort to show that the government was doing its part to contain the fallout, Prime Minister Yoshihiko Noda told his cabinet last week to prepare a fresh stimulus package by next month.

With the total believed to amount to around 1 trillion yen, the plan's limited scope and lack of detail failed to impress markets. But Maehara said the first batch of the planned measures announced on Friday and worth about $5.3 billion would add 0.1 percent to Japan's gross domestic product.

($1 = 80.1650 Japanese yen)

(Writing by Tomasz Janowski; Editing by Jacqueline Wong)

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