Japan's government warned today that deflation, high job losses and weaker global growth could hurt the fragile economic recovery, and the finance minister called on the central bank again to help it fight price falls.
The government hasn't said exactly what it wants the Bank of Japan to do, however, and while both sides say they share the same view on deflation, the BOJ has resisted further steps after caving in once in early December as the yen hit a 14-year high.
Despite the stalemate, analysts say the BOJ could take fresh action if risk aversion hits the financial markets again, knocking down Japanese share prices and sending the yen higher, as that could blow the recovery off course.
"If, for instance, US payroll data were to turn out very weak and send the yen higher, the BOJ would probably take more action," said Takuji Aida, an economist at UBS Securities.
"The BOJ may extend its cheap fund offer to six months from the current three months, or it could increase its offer of three month funds," he said, referring to the special operation the BOJ announced on December 1st under pressure from the government.
In a monthly report, the government reiterated that it would work with the central bank to overcome deflation and ensure an economic recovery, even as it maintained its overall view that the economy is picking up.
"The government and the BOJ are basically in agreement about the need to overcome deflation. The government is doing what it should and it expects the BOJ to do the same," finance minister Naoto Kan said.
But the minutes of a central policy-setting meeting in late January showed the BOJ is in no rush. While some board members noted surveys showing a decline in consumers' near-term price expectations, the board decided against fresh steps as it judged that its policy was accommodative enough to support the economy.
Government representatives at a board meeting lat month called on the central bank again to help it overcome deflation through flexible monetary policy, the minutes showed, but the board took no action and kept rates on hold, as it did this month.
The board agreed that deflationary pressure would drag on even as it nudged up its price forecasts, while a few members said consumers' longer-term price expectations - which the central bank thinks are the most important thing to look at - have not changed much, the minutes showed.
Some BOJ board members said market attention to the nation's fiscal deficit was increasing and that it was becoming more important to gain market trust in fiscal and monetary policies, the minutes showed.
In its economic report, the government slightly downgraded its view on exports, saying export growth may be turning moderate, adding that Toyota Motor's recall woes were a concern for the economy.
"Strong growth in Asia-bound exports seems to be slowing. And we also have to consider Toyota's recalls. So we've given a cautious judgment on exports," said Keisuke Tsumura, Parliamentary Secretary of the economy.
Toyota's sales have fallen since it recalled more than 8 million vehicles globally for problems including sticky accelerators and a braking system glitch in its hybrid models.
Japan's economy grew 1.1 per cent in the three months to December, but it is expected to slow early this year as the boost from stimulus-fuelled spending fades.
Reuters