Japan’s central bank has announced that it has already done enough to combat deflation, brushing off yet another call for more action from the ranks of the ruling party.

Bank of Japan Deputy Governor Hirohide Yamaguchi dismissed a suggestion from a Democratic Party lawmaker that the central bank should consider scrapping a self-imposed cap on its government bond purchases to be able to buy more debt and reflate the economy.

Yamaguchi told a parliamentary committee there could be turmoil in financial markets if they got the impression that the central bank was directly financing government debt.

“We are aware that if the BOJ’s long-term bond buying is mistaken for monetising government debt, that could upset financial markets,” he said.

The central bank has kept rates near zero and introduced several emergency funding schemes to help the economy recover from its worst slump since World War Two, but it has still been bombarded for weeks by government calls for more efforts.

Yamaguchi, however, said he believed the crisis-fighting measures already in place should start bearing fruit soon.

“I expect Japan’s economy to return to a sustainable growth path with price stability as early as possible as a result of the measures” the BOJ has taken so far, he said.

Analysts say the pressure for more BOJ action reflected government fears that falling prices and a strong yen could push Japan back into recession in a year of upper house elections and its recognition that there was very little it could do with the national debt is already nearing 200 percent of GDP.

Impressing voters
Standard & Poor’s last month cut the outlook on Japan’s AA sovereign debt rating to negative, warning of

a downgrade unless measures were taken to stem fiscal and deflationary pressure.

“BOJ policy board members have said one after another that the central bank is doing what it can to fight deflation, so it is wrong for the government to expect too much from the central bank,” said Hideo Kumano, chief economist at Dai-ichi Life Research Institute.

“Still, the government is repeating its requests for the BOJ to do more apparently because it wants to give the impression to voters that the government and the BOJ are making joint efforts, ahead of the election in July.”

In that vein, Finance Minister Naoto Kan repeated that he would keep in close contact with the BOJ in efforts to beat deflation.

Deflation, where both investment and consumption are likely to be put off due to expectations of cheaper prices later, has bedevilled Japan off and on for years, despite virtually zero interest rates and massive public spending.

However, the central bank expects the pace of price falls to ease gradually, so is reluctant to ease monetary policy further.

It is also reluctant to buy more than its current 21.6 trillion yen ($241bn) per year of government bonds because the balance of its holdings is near its self-imposed cap.

Adrian Foster, head of financial markets research at Rabobank International in Hong Kong said one step the central bank may take to placate the government is to extend its funding scheme for banks, which it introduced at an emergency meeting on December 1 after weeks of immense political pressure.

The BOJ is virtually alone in expanding monetary easing. The Federal Reserve and the European Central Bank have said they will start phasing out their emergency lending and liquidity facilities in light of improvements in credit markets.