[TOKYO] Japan looks increasingly likely to fire both fiscal and monetary barrels in the coming weeks to help recovery and arrest unwelcome gains in the yen, with direct currency intervention off the table after a cool reception from its US ally.
After the rising yen helped push exports down for a sixth month in March and deadly earthquakes hit southern Japan last week, the Bank of Japan (BOJ) is facing calls from government aides to promptly expand its money-printing stimulus.
Prime Minister Shinzo Abe is already set to announce a fiscal stimulus plan of up to 10 trillion yen (S$123 billion) extra spending around the time he hosts a Group of Seven summit in late May, which could agree on more government expenditure to boost global growth.
And he could top that up with disaster-relief spending after the quakes, say government and ruling party officials involved in the policy-making.
Mr Abe's aides also said the economic impact of the quakes raised the chances he would delay a sales tax hike scheduled for next year and increased the need for more central bank action.
"If output weakens and consumer sentiment cools as a result of the quakes, the conditions justifying additional monetary easing would all fall into place," said a senior government official with direct knowledge of policymaking.
The BOJ has been printing up to 80 trillion yen a year to buy bonds since 2013 in a bid to end decades of stagnation and deflation, and sources have told Reuters it is likely to debate further monetary easing when it reviews policy on April 27-28.
Though policymakers hope a combination of fiscal and monetary stimulus measures will head off the yen's rise and restart Japan's stalled economic recovery, some doubt that the weapons available to the central bank and government are powerful enough to make much difference.
Hideo Kumano, chief economist at Dai-ichi Life Research Institute, said it was "uncertain whether tax revenues will increase enough to fund a big spending package", and the BOJ's most recent gambit - negative interest rates - had failed to trigger the desired market response.
There are also concerns that the BOJ so dominates the market for Japanese government bonds that it is becoming increasingly difficult to satisfy its existing demand, let alone a further increase.
Despite such doubts, looser monetary policy might be the only show in town to cool the yen, after Washington last week emphasised G20 commitments to avoid currency devaluations, apparently brushing off Tokyo's view that the yen's rise was "one-sided".
The US dollar hit 17-month lows below 108 yen last week, unsettling policymakers, who see any slide in the currency pair below 105 yen as alarming. It has since rallied a little to around 109 yen.
Though there have been signs of growing tension between Mr Abe and central bank governor Haruhiko Kuroda - each expecting the other to do more to address Japan's economic ills - they appear to see eye to eye on addressing an overly strong yen.
Mr Kuroda has also described the yen's rise as excessive and warned that he could use monetary policy if it jeopardises his target of pushing inflation up to 2 per cent, a goal that has already missed one deadline after another.
There are even calls for the BOJ to resort to "helicopter money" - printing fresh cash for direct injection into the economy, instead of its current easing measures, which direct new money to the banks, in the hope that they boost lending to the economy.
Kozo Yamamoto, a senior ruling party lawmaker and key Mr Abe aide, on Thursday urged the government to prepare a spending package of around 20 trillion yen to be funded by the BOJ's money printing.
The fiscal package in the works already includes plans to offer payouts to families with children and higher salaries to employees in child-care facilities.
Such spending, aimed at increasing Japan's birth rate and having more women return to the workplace, could add up to around 7 trillion yen over the next few years, internal government estimates show.
While the government hasn't produced estimates on the exact damage from the quake, disaster relief could add another 5 trillion yen to the bill, some analysts say.
Mr Kuroda has said he won't resort to helicopter money, but his policies have brought negative yields on government bonds for up to 10 year tenors, which effectively means government borrowing creates a newly printed profit it can spend.
"We're already essentially doing helicopter money," said one of the officials with direct knowledge of policy-making.