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Finance Minister Naoto Kan repeated a plea for the Bank of Japan to work with the government on reversing a decline in prices that threatens the economic recovery.

“Fiscal policy focusing on stimulating demand will have some impact against deflation,” Kan said in the Diet as the BOJ began a two-day meeting in Tokyo. “The central bank can make an inflationary impact with monetary policy.”

Kan has been pressing the BOJ to do more as his ability to spur the recovery is constrained by a public debt burden that’s approaching 200 percent of gross domestic product. BOJ Gov. Masaaki Shirakawa and his colleagues will expand a ¥10 trillion credit program for lenders at the meeting, according to 12 of 17 economists surveyed by Bloomberg.

National strategy minister Yoshito Sengoku also urged the central bank to consider ways to support an economy as it tries to rebound from its deepest postwar recession.

“The BOJ’s monetary-policy decisions can have a significant impact on people’s sentiment,” Sengoku told reporters in Tokyo on Tuesday. “I hope they implement policies that would be positive for production activity, capital investment and consumer spending.”

Consumer prices have declined for 11 straight months as supply outstrips demand. Kan has said he wants prices to resume rising this year, while the BOJ forecasts they will keep falling through the year ending March 2012.

Eisuke Sakakibara, the nation’s former top currency official, said Tuesday in the Diet that policymakers’ options for fighting deflation were limited because it is not a monetary phenomenon.

“There isn’t much leeway to control it with policy” because price declines are being driven by ‘structural factors,’ ” Sakakibara said.

The BOJ unveiled the lending measures in December after the yen surged to a 14-year high of 84.83 against the dollar and government ministers, including Kan, urged the BOJ Policy Board to escalate the fight against deflation. A separate facility that offers lenders unlimited collateral-backed loans is scheduled to expire at the end of this month.

The board will keep the benchmark interest rate at 0.1 percent at this week’s gathering, all 17 analysts predicted.

Kan said stable currency moves are desirable and he is prepared to act should markets move in an “abnormal manner.” Foreign-exchange rates should be determined by financial markets “in principle,” he added.

Japan hasn’t stepped into the currency market since 2004.

More funding?

Kyodo News

The Bank of Japan began a two-day Policy Board meeting Tuesday, with market players closely awaiting its decision on whether to ease its ultraloose monetary policy further to combat deflation, and if so, what measures it will take.

The BOJ is widely expected to keep its key interest rate on hold at 0.1 percent, the level it has maintained since December 2008.

The key focus of the meeting is whether the BOJ will take additional steps, such as the expansion of the ¥10 trillion funding program it introduced in December, to pump more money into the financial system, in response to the government piling pressure on the central bank to do more to combat deflation.

Sources said the BOJ is leaning toward introducing additional monetary easing due to growing concerns that sentiment among both companies and consumers has cooled since November, when the government declared the economy to be in deflation, making the escape from declining prices a more difficult proposition.

But there is also a possibility the central bank may hold off any new policy action this time to check key upcoming data, including the BOJ’s “tankan” business confidence survey due out April 1, before taking additional steps.

In the case of the BOJ taking further steps, the most likely option will be expanding the fund supplies for its newly introduced fixed low-interest loan program beyond the current cap of ¥10 trillion, or extending the duration of the loans beyond three months.

Under the funding program, the central bank has been offering financial institutions three-month loans at a fixed interest rate of 0.1 percent against collateral such as government bonds and corporate debt. The BOJ decided on the funding scheme at an emergency policy meeting in December in reaction to the yen’s sharp appreciation against the dollar amid concerns over debt problems in Dubai.

The economy has been showing signs of a recovery, with real gross domestic product expanding at a 3.8 percent annualized pace in the last quarter of 2009, but prices have continued to fall.

The core consumer price index, which strips out volatile fresh food prices, fell in January for the 11th consecutive month.

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