Some policymakers have called on the BoJ to step up purchases to tame rising bond yields, which threaten an economic recovery. Prime Minister Yukio Hatoyama echoed his finance chief, Naoto Kan, in calling for BoJ co-operation, telling parliament that the government will work with the central bank to overcome falls in prices.
The comments came after data showed Japan's narrowest measure of consumer inflation fell at a record pace in December, underscoring persistently weak domestic demand that is hobbling the world's second-largest economy. Kan, known as one of the most vocal cabinet critics of the BoJ, took a slightly stronger stance than Hatoyama, calling for the central bank to take a flexible approach on policy to support the economy.
"I expect the BoJ to support the economy by guiding monetary policy appropriately and flexibly, while keeping close contact with the government, in a way that is consistent with government efforts," he said on a policy speech.
Hatoyama's government, which faces an upper house election in mid-2010, has little room to boost spending further as the national debt is now almost twice as big as the country's annual gross domestic product. Credit ratings agency Standard and Poor's this week warned that it may cut the country's rating.
Kan said restoring fiscal health is indispensable for steady economic growth. The BoJ has been hesitant to increase its bond buying further, arguing that doing so would give markets the impression the bank is underwriting public debt. "Trying to influence interest rates or monetising public debt would go against the central bank's basic principle, which is to achieve sustainable economic growth with price stability," Shirakawa told a forum. "In supplying ample funds to the market, I think the bank's current bond purchasing amount is appropriate," he said.
The BoJ currently buys 21.6 trillion yen ($240 billion) of government bonds from the market per year. The central bank, under pressure from the government, has toughened its stance on deflation and on December 1 decided to offer commercial banks more short-term funds. Under BoJ law, the central bank needs to take currency and monetary adjustments that are in line with the government's basic economic policy.