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The yen’s surge to a 14-year high and renewed deflation may prompt Japanese Prime Minister Yukio Hatoyama to press the central bank to take further steps to support growth.

Hatoyama, 62, will meet Bank of Japan Governor Masaaki Shirakawa “soon,” Chief Cabinet Secretary Hirofumi Hirano told reporters yesterday. Hirano said the leaders will discuss quantitative easing policies in addition to falling prices and the stronger currency.

The government has stepped up calls on the central bank to prop up growth since it declared the economy was in deflation on Nov. 20. Shirakawa, who yesterday pledged to act “promptly and decisively,” has few options given that the key overnight lending rate is at 0.1 percent and the bank is already purchasing government bonds and corporate debt.

“We’re not in a situation where the BOJ will act just because the government is pressuring it to,” said Junko Nishioka, a chief economist at RBS Securities Japan Ltd. in Tokyo. “There’s an election next year, so the government wants to show how much it has already done.”

Nishioka said she didn’t expect any policies to be announced from the central bank after this week’s meeting with Hatoyama, given that it’s common for policy makers to meet and discuss the economy and financial markets.

Deflation can undermine economic growth by making debt burdens heavier, eroding corporate profit margins and deterring capital investment and consumer spending. Japanese prices excluding fresh food slid 2.2 percent in October from a year earlier, a near record drop, and the government’s declaration of deflation was its first in more than three years.

‘Promptly and Decisively’

“The bank is always prepared to act promptly and decisively if judged necessary to ensure the stability of financial markets,” Shirakawa said yesterday in Nagoya, central Japan. “The bank will do its utmost to overcome deflation both in terms of monetary easing and ensuring the stability of the financial markets.”

Reports yesterday showed Japan’s recovery from its worst postwar recession may be weakening. Industrial output grew at the slowest pace in eight months in October as manufacturers including Toyota Motor Corp. pared production at home. Wages tumbled 1.7 percent, extending their longest losing streak in six years.

Hatoyama championed the Bank of Japan’s independence after he took power in September following his Democratic Party of Japan’s landslide August election victory. Hirano reiterated yesterday that the government respects the bank’s autonomy.

Testing BOJ

Other Cabinet members haven’t been shy in testing the central bank. Deputy Prime Minister Naoto Kan said on TV Asahi last week that he’d “like to see monetary policy work just a little harder” to battle deflation. Financial Services Minister Shizuka Kamei said in October that the bank “sometimes sounds like it’s talking in its sleep.”

“Hatoyama’s Cabinet seems to think that the BOJ isn’t playing a big enough role in fighting deflation,” said Susumu Kato, an economist in Tokyo at Calyon Securities. “The government may ask the BOJ to increase the amount of its government bond purchases” to around 2 trillion yen ($23 billion) a month from 1.8 trillion yen, Kato said.

The government may be looking for monetary policy measures to combat prices and the yen because it has the highest debt burden in the industrialized world, limiting the scope of fiscal policy. Nevertheless, Finance Minister Hirohisa Fujii said yesterday that he is compiling an extra budget of more than 2.7 trillion yen, the amount of money frozen from the previous administration’s budget, to spur growth.

Quantitative Easing

The BOJ introduced quantitative easing steps in March 2001 before suspending those policies in March 2006. Shirakawa has said the policy of flooding the economy with cash had a limited impact on economic growth.

Hatoyama and Shirakawa are also likely to discuss the yen, which rose to a 14-month high of 84.83 to the dollar on Nov. 27, setting off a chorus of complaints from Japanese manufacturers. Canon Chief Executive Officer Fujio Mitarai said Japan is “standing on the edge of a cliff.”

Shirakawa said yesterday the government will decide whether to intervene, adding that the central bank will “closely watch these developments and their effects with great interest.”

Canon Inc. would lose 4.4 billion yen in sales and 2.5 billion yen in operating profit this quarter for every 1 yen drop in the dollar compared with its forecast of 90 yen, the company said on Oct. 27.

Japan last intervened in the currency market in March 2004, when the yen traded around 109 per dollar. The central bank sold 14.8 trillion yen in the first three months of that year.

“We’re paying close attention to whether the BOJ will go along with intervening in the market,” said Shinichi Ichikawa, chief market strategist at Credit Suisse Securities Japan. “Intervention would stop the bleeding for now, so it’s important.”

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