Liberal Democratic Party President Shinzo Abe, who will become prime minister on Dec. 26, and New Komeito leader Natsuo Yamaguchi agreed Tuesday to compile a large-scale supplementary budget for fiscal 2012 as they kicked off talks to form a coalition government.

Abe also met with Bank of Japan Gov. Masaaki Shirakawa earlier in the day and urged the central bank to set an annual inflation target of 2 percent for the consumer price index.

In their chat held a day ahead of a two-day BOJ Policy Board meeting, Abe also told Shirakawa that his incoming government wants to reach a policy accord with the BOJ under which the bank will set the inflation target and keep pursuing monetary easing until achieving it.

Abe’s remarks could affect discussions during the Policy Board meeting about the future course of monetary policy. Some market participants said their attention was turning to Shirakawa’s next news conference, scheduled for Thursday.

Abe’s meeting with Shirakawa and New Komeito’s Yamaguchi may signal the start of aggressive monetary and fiscal policy as advocated by the LDP. In the run-up to Sunday’s election, in which the LDP won by a landslide, Abe had called on the BOJ to buy government construction bonds. He later backpedaled.

Also during the campaign, Abe called on the central bank to drastically ease its monetary grip and pledged to increase public works spending to boost the economy, with some LDP members demanding as much as ¥200 trillion in spending over 10 years.

Facing reporters after the meeting, Yamaguchi stressed the extra budget will be the “very first agenda” item pushed by the new administration.

LDP Secretary General Shigeru Ishiba also said the new government will place strong emphasis on reconstruction of the Tohoku region’s coast devastated by last year’s earthquake and tsunami, including the area affected by the Fukushima nuclear crisis.

Neither Ishiba nor Yamaguchi mentioned how large the extra budget will be, but it is expected to be worth trillions of yen.

Abe also plans to create the post of new “economic revitalization minister” to head the Council on Economic and Fiscal Policy, sources said.

The council served as a key advisory body under past LDP-led governments, especially when Junichiro Koizumi was prime minister in the early 2000s, but it was abolished after the Democratic Party of Japan took over the government in 2009. LDP policy chief Akira Amari has been floated as a candidate for the new post.

Public attention has also focused on whether the diplomatically dovish New Komeito will ward off the LDP’s moves under the hawkish Abe to amend the pacifist Constitution.

New Komeito’s key backer is the huge Buddhist lay organization Soka Gakkai.

On Tuesday, Yamaguchi told reporters the two parties’ policy talks will focus mainly on what the new LDP-New Komeito coalition government will do, not what the Diet will do.

Yamaguchi’s remarks indicate the two parties may exclude issues related to constitutional revision from their ongoing policy talks.

To revise the Constitution, two-thirds or more of Lower House and Upper House lawmakers must support the idea, followed by a national referendum, and the government does not play a role in this process.

“We didn’t discuss (constitutional issues) today. We will eventually examine various matters,” Yamaguchi said without elaborating.

Information from Kyodo added

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