The government kept up pressure on the Bank of Japan on Monday to prevent it from raising interest rates too quickly, but the central bank governor insisted on keeping a free hand on monetary policy.
The jostling comes as market speculation grows about how early the central bank will raise interest rates from present levels near zero on a strengthening economy after it ended its five-year-old hyper-easy monetary policy nearly three weeks ago.
Signs of consumer price inflation and rises in land prices in the country's three major metropolitan areas for the first time in 15 years fuelled such speculation, but data on Monday fell on the soft side.
A government survey on Monday showed big Japanese manufacturers were less optimistic about business conditions in the three months to March, though the outlook for the following two quarters was brighter and economists said an economic recovery would continue.
The government is concerned that a premature rise in interest rates could hurt the economy. It is also worried about a possible rise in bond yields, which would boost the costs of funding massive state debt.
Prime Minister Junichiro Koizumi, while lauding the central bank's policy shift as "appropriate" and saying markets reacted calmly, said the central bank must work with the government.
"Specific policy measures are up to the BoJ, but it must make its decisions while understanding the direction of government policy," he told a parliamentary committee.
Chief Cabinet Secretary Shinzo Abe, the top government spokesman, told the committee the central bank needs to ensure the economy does not slip back into deflation and must act responsibly.
Anticipation among some market players of an early end to zero interest rates prompted the yield on 10-year government bonds to climb to 19-month highs last week, though yields slipped back on Monday.
Koizumi reiterated he hoped deflation would be beaten by the end of his tenure in September.
The BoJ, whose policy shift reflected its confidence that a seven-year battle against deflation has been won, does not believe higher rates would hurt the economy as it is starting from a very low point.
Asked about deflation, BoJ Governor Toshihiko Fukui told the committee the central bank was watching not just price indicators but the economy overall, both of which were moving "in a good and steady direction".
"Monetary policy should be conducted with the most appropriate timing with a delicate touch to reflect changing economic and price conditions," he said.
Separately, government sources said a former official at Japan's second-biggest bank is to join the BoJ's Policy Board in place of the member widely seen as the sole opponent of the BoJ's decision to shift policy on March 9.
Tadao Noda, a former vice president of Mizuho Financial Group, will replace Shin Nakahara, whose term expires in mid-June, the sources said.
Data on Monday showed the business survey index of sentiment at large manufacturers fell to plus 3.1 in the January-March quarter from plus 10.5 in October-December.
But responses on the outlook showed the index for big manufacturers at plus 6.8 for April-June and plus 9.7 for July-September, according to the joint survey by the Ministry of Finance and the Economic and Social Research Institute, an arm of the Cabinet Office. "A drop to 3.1 is reasonably big," said Hiroshi Shiraishi, an economist at Lehman Brothers in Tokyo.
"But I'm reasonably confident about the outlook. The outlook indices are pointing up, so overall it's not that bad," he said.
The survey also showed firms expect capital spending to fall 8.7 percent in the financial year starting on April 1, after an 11.1 percent gain in 2005/06.
Yoshimasa Maruyama, an economist at BNP Paribas in Tokyo, said, "The capital spending figures indicate a fall, but it is likely due to companies not having finalised their plans for the next fiscal year. It may well be revised much higher."
Japan's domestic corporate services price index, which tracks prices of business-to-business services, rose 0.4 percent in February from the previous month, although it was down 0.1 percent from a year earlier.
Markets are now focusing on consumer price data due on Friday and the BoJ's tankan survey of corporate sentiment on April 3.
Strong readings could renew speculation of an early interest rate increase by the BoJ.