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. Last Updated: 07/27/2016

Japan Deflation Plan Skips Bank Issue

TOKYO -- Japanese officials added their final touches to a keenly awaited package of anti-deflation steps Tuesday, but an early draft only highlighted that they had no magic wand capable of transforming the ailing economy.

Above all, the draft offered little new insight into the controversial issue of whether to inject public funds into the ailing banks.

"If there is a risk of financial crisis and if we see a need under the laws, we will take all necessary steps, including capital reinforcement, to stabilize the financial system," it said.

Prime Minister Junichiro Koizumi's panel of economic advisers, the Council on Economic and Fiscal Policy, is expected to unveil the measures Wednesday after an evening meeting.

The government, its hands tied by Koizumi's pledge to control spending, has been putting the onus on the central bank to reverse a fall in prices.

"The government and Bank of Japan must work as one to overcome deflation," the draft said, repeating a well-worn theme and avoiding mention of specific steps. "We call on the Bank of Japan to take bold monetary policy."

Investors were not impressed by the lack of substance. "It looks like the same old tune, with the government dishing out bits and pieces as they go, and not a bold, comprehensive plan," said Hirokazu Yuihama, a strategist at Daiwa Institute of Research.

The benchmark Nikkei average fell nearly 1 percent to 10,202.63 by the end of trade. The yen also eased slightly, trading at around 134.10 to the dollar.

One of the few fresh policy suggestions was to study the idea of issuing inflation-linked government bonds as part of broader research into analyzing fluctuations in domestic prices.

Some policy-makers have suggested inflation-indexed bonds as a way to help the government diversify its huge financing and measure the market's expectations on future inflation.

Conflicting comments from officials earlier had forewarned investors that the package may be less than inspiring.

Finance Minister Masajuro Shiokawa said he would ask the Bank of Japan to raise its outright buying of government bonds to 1 trillion yen ($7.47 billion) a month from 800 billion.

But Economics Minister Heizo Takenaka backed away from his usual calls for further action by the central bank, saying the government was not in a position to make specific requests.

To complicate the picture, the dominant Liberal Democratic Party announced its own set of anti-deflationary proposals, most of which were not included in the government's draft.

The LDP's proposals included a call on the BoJ to be flexible in buying a wider range of assets such as foreign bonds and stocks. It also called on the BoJ to adopt an inflation target.

BoJ Governor Masaru Hayami earlier told a parliamentary committee that the central bank had no intention of adopting such a target, saying it was neither feasible nor appropriate.

"Interest rates are close to zero and liquidity is ample, but prices have not risen," he said. "It is difficult to raise prices through monetary policy alone."