Finance Minister Taro Aso and Bank of Japan Gov. Haruhiko Kuroda pledged on Friday to deploy all necessary fiscal and monetary policy tools to combat the widening economic fallout from the coronavirus pandemic.
After a rare bilateral meeting, the two issued a joint statement committing to do "whatever it takes" to facilitate corporate financing and stabilize markets as part of efforts to cushion the blow from the health crisis.
"Japan's economy is in an extremely severe state and we need to pull out of this situation as soon as we can," Aso told reporters after the meeting.
"By meeting like this, we wanted to convey to the world that Japan's government and the central bank are working as one to combat the pandemic," he said.
The bilateral meeting came hours after an emergency BOJ rate review at which the central bank decided to create a new loan scheme to channel more funds to small businesses hit by the coronavirus.
The pair's first such meeting in nearly four years underscores the concern Tokyo has over the growing risk that without firmer policy steps, the pandemic could lead to a spike in bankruptcies and job losses that may leave a lasting scar on a fragile economy.
Japan slipped into recession for the first time since 2015 in the first quarter of the year, putting the economy on track for its deepest postwar slump as the health crisis shuts down businesses and consumer spending.
Aso and Kuroda frequently interact in the Diet on government panels and at international meetings. But it is their first official one-on-one meeting since 2016, when Britain's surprise vote to exit the European Union jolted markets.
Central banks around the world have slashed interest rates and pumped out huge amounts of money to finance massive spending packages to cushion the blow from the pandemic.
The BOJ expanded its stimulus in March and April, ramping up risky asset purchases and pledging to buy as many government bonds as needed to cap long-term borrowing costs at zero.
For its part, the government is set to unveil next week a fresh batch of spending measures to combat the virus fallout, on top of the record $1.1 trillion stimulus package it announced in April.
In a joint news conference with Aso, Kuroda said the BOJ's yield curve control (YCC) is designed in a way to ensure that long-term borrowing costs do not rise too much even if the government ramps up spending via additional debt issuance.
"Our policy framework can keep long-term interest rates from rising even if the government increases bond issuance. It helps enhance the mutual effects of fiscal and monetary policies," he said.
Under YCC, the BOJ pledges to buy as much bonds as needed to keep 10-year government bond yields around 0 percent. It also guides short-term interest rates at -0.1 percent.
While the government has lifted the state of emergency put in place in most prefectures that led to infection numbers stabilizing, some regions including the Tokyo metropolitan area still have restrictions in place. Those measures are due to be reviewed next week.