The government didn't free up more money for banks to shore up their capital, saying only it will take "any measures needed" to prevent a financial crisis. The Financial Services Agency should complete its inspection of the nation's lenders by March 31 and immediately release the results, the government said.
If Koizumi is serious about ending deflation, he should abandon his self-imposed ?30 trillion cap on new bond sales to regain some flexibility in policy, said ING's Jerram. That would allow him to suspend the 5 percent sales tax or offer income tax credits to spur consumer spending.
The government should also legislate an inflation target for the central bank and impose penalties if the target isn't met, he said. It should also close weak companies and accept the job losses that would ensue.
That's unlikely to happen because job losses are anathema to a government that's tried to hold Japan Inc. together through an 11-year economic slump by propping up insolvent companies and using taxpayers' money to bail out banks.
The government's call for further policy easing from the central bank may fall on deaf ears if Governor Masaru Hayami isn't convinced legislators are doing enough to stamp out deflation.
While 21 of the 23 economists, investors and traders surveyed by Bloomberg News expect the bank to do that when its policy-setting board meets tomorrow, nine said the bank will act only if the government releases convincing measures to fight deflation.
Signs of a rift between the central bank and the government may shatter investor confidence that policy makers can avert a deflationary spiral where prices, wages and incomes all decline.
"If the BOJ stands pat, then that would signal Japan's policy makers are lacking solidarity," said Yasunari Ueno, chief economist at Mizuho Securities. "That may send a negative signal to investors and hurt Japan's stock market very badly."
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