Tension is mounting between the Japanese government and its central bank over how to fight deflation, but analysts said ideas being thrown around fail to tackle the cause -- weak demand amid a deep recession.
A government panel is devising a raft of new measures to tackle the nationwide price slide, which has sapped corporate profits in Japan since the middle of the 1990s and raised the value of debt in real terms.
The plan should contain methods to speed up bad loan disposals at banks and stimulate slumping Japanese share prices, said State Minister for Economic and Fiscal Policy Heizo Takenaka.
It should also urge further monetary easing by the Bank of Japan. But bank governor Masaru Hayami insists pumping more cash into the market is ineffective because the system is already awash with funds, with banks reluctant to lend as fresh loans turn sour amid a fierce economic slump.
Analysts predict the Council of Economic and Fiscal Policy chaired by Prime Minister Junichiro Koizumi will unveil an outline of the plan before a visit to Japan by US President George W. Bush, who is due to land in Tokyo on Sunday.
But they say the measures will show the government has lost its fight with deflation before battle has officially started.
"You have to figure out where deflation comes from, and over the last three months it has come from a new source, which is a demand deficiency, wages are falling, unemployment is rising and capex [capital expenditure] is being cut," said Merrill Lynch chief economist Jesper Koll.
"So they need a demand-stimulus policy and there is only two ways they can do that: by raising fiscal spending or cutting taxes," he said.
But Koizumi has pledged a policy of fiscal restraint to rein in national debt as part of an initial reform drive made when he took office last April.
Forcing banks to speed up bad loan write-offs -- also part of Koizumi's original restructuring initiative -- was vital for an economic recovery but it would not directly encourage consumers to spend, said Koll.
"[The issue of demand] is completely neglected in the current debate ... as the ad hoc apparatus is swung into high gear before the presidential visit."
Japan's central bank has tried to stimulate prices by repeated quantitive easing, but with interest rates effectively at zero, it maintains the true benefits of ultra-easy monetary policy can only be felt if the government makes progress with structural reforms.
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