Group of Seven finance leaders at their latest meeting in Sicily shared the view that prices in Japan are continuing to decline and downside risks remain.

Although Bank of Japan Gov. Masaru Hayami later said there was no call for quantitative credit easing, that's exactly the initiative Japan's G7 partners want the BOJ to take.

Hayami has cited four possible approaches to quantitative credit easing: assuring ample liquidity in the financial market; setting a quantitative target for market operations; increasing outright purchases of long-term government securities; and intervening in the currency market to hold the yen down.

In a sense, the BOJ already took steps to encourage quantitative credit easing when it decided to resume outright purchases of short-term government bonds at its policy-setting committee meeting on Feb. 9, thus injecting liquidity into the market.

While the option of setting an inflation target is widely expected in the marketplace, this experimental approach cannot be taken unless the situation becomes worse than when the "zero-interest-rate" policy was introduced.

In its monthly report released Feb. 13, the BOJ warned of growing downside risks for the economy. This came just days after it cut the discount rate, introduced a new lending facility and resumed outright purchases of short-term government securities. But doubts remain over the effectiveness of these strategies.

Given the sluggish demand for funds from corporations and individuals, financial institutions appear likely to increase investment in bonds whose values are rising, rather than increasing loans or stock investment.

It is therefore likely that fiscal stimulus measures will have a limited effect.

An option widely expected by the market is that inflation will be stimulated artificially, which will prevent prices from falling — also an experimental step.

At the G7 meeting, the structural problems of the Japanese banking industry — bad loans — were discussed once more. Quantitative credit easing will be a complementary measure to help ease the pains arising from structural reforms.