Japanese Prime Minister Naoto Kan and Bank of Japan Governor Masaaki Shirakawa discussed the yen and agreed to work closely in a phone conversation on Monday, but Kan did not ask the central bank to ease monetary policy further.
The government's chief spokesman said the two did not touch on currency intervention either, disappointing markets which had expected a bolder policy response or even a signal of one after the yen's surge to 15-year highs earlier this month.
"There is a sense of disappointment and it is in doubt whether anything was decided," said Hideki Hayashi, global economist at Mizuho Securities' fixed income research department. Bond yields have fallen and the yen has pared gains in recent sessions on speculation the BoJ may try to pre-empt government pressure for action and further loosen its already ultra-easy policy at an emergency meeting before or shortly after the talks between Shirakawa and Kan.
"They exchanged views on the economic and financial situation including foreign exchange," Chief Cabinet Secretary Yoshito Sengoku told a news conference on Monday. "They agreed that it was important for the government and the BoJ to communicate closely with each other."
Sengoku added that the government wanted to consider whether Kan and Shirakawa should meet in person, although he did not give a timeframe. Kan did not make any request on monetary policy to the central bank chief, a BoJ source said, The dollar edged down to 85.30 yen from around 85.45 yen after Sengoku's comments, partly on disappointment that no firm commitment to monetary easing came out of the talks.
Sources had told Reuters that Kan and Shirakawa may meet on Monday to craft a response to the surging yen which is trading around at its highest level against the dollar since 1995, threatening to dent Japan's export-reliant economy. But sources say the BoJ is unlikely to act before its next regular policy meeting on September 6-7 unless the yen heads towards its all-time high past 80 to the dollar at a pace of 2 to 3 yen per day.
Mizuho's Hayashi said the chat was also part political performance ahead of a September 14 ruling Democratic Party of Japan (DPJ) DPJ leadership vote, in which Kan could face a challenge from party powerbroker Ichiro Ozawa, or a proxy candidate.
Growth in Japan's economy slowed to a crawl in the second quarter and analysts see more weakness ahead as the US recovery sputters. The government is trying to compile a package of measures by early September to support the economy by early September, which may include extending the deadline for subsidies on energy-efficient electronics and homes to encourage more consumer spending.
A senior Democratic Party official said the ruling party hopes to compile proposals on the package by August 26, which will be reflected in the government's stimulus plan. While some lawmakers are calling for big spending, the government is likely to use money redirected from other areas to fund the stimulus measures given Japan's dire fiscal straits, making any positive impact on the economy minor. Government bond yields at the short end of the curve eased and the yield curve flattened last week as investors priced in the chance that the BoJ could ease policy in an attempt to help combat yen strength and support the economy.