TOKYO, Nov 25 (Reuters) - Tension is brewing between Japan's new government and the Bank of Japan over how to manage the nation's fragile recovery as the world's No.2 economy faces its second bout of deflation in less than a decade.
Here are some questions and answers about the row.
WHY IS THE GOVERNMENT PUTTING PRESSURE ON THE BOJ?
Prime Minister Yukio Hatoyama's government, which took office in September, needs to keep stimulating the economy to avoid a second recession but must also address growing investor and voter concerns about Japan's ballooning public debt, which at 170 percent of GDP is the highest among industrialised nations.
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Graphic on Japan fiscal pressure: http://r.reuters.com/paw97f
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Some in the cabinet have criticised the BOJ for what they say is its rosy view of Japan's economic outlook and fretted over the bank's intention to exit from emergency funding measures. In a nutshell, the government wants the BOJ to do everything it can to help the economy.
Voter support for Hatoyama's cabinet is above 60 percent but slipping gradually. The nightmare scenario for Hatoyama is an economic downturn ahead of an upper house election in mid-2010.
His Democratic Party wants to win an outright majority in the upper house to avoid relying on two small but vocal coalition allies to get measures passed unopposed. A return to recession could scuttle those chances.
Hatoyama also made many promises to voters ahead of elections in August that brought his party to power, such as payouts to farmers and families with children to spur consumption.
These programmes could be threatened either by the economy returning to recession or by Japan's fiscal problems. Opinion polls show many Japanese would support a cost-cutting drive, however, so this gives Hatoyama some cushion. Critics say the government lacks a broad growth strategy and that its own stimulus plans will not help the economy much.
WHAT DOES THE GOVERNMENT WANT FROM THE BOJ?
A government declaration last week that the economy was in deflation -- a sustained period of falling prices -- was a message to the BOJ that it should do its part, said National Strategy Minister Naoto Kan.
Cabinet ministers have been vague on what they want from the BOJ beyond keeping interest rates near zero. Analysts say the most likely option is for the central bank to increase its government bond purchases to cap any rises in long-term yields.
The government is considering holding regular talks with the BOJ to exchange views on the economy and financial markets. Such talks would likely bring together BOJ Governor Masaaki Shirakawa, Finance Minister Hirohisa Fujii and Kan.
IS THE CABINET UNITED ON THE ISSUE?
At a time when the cabinet has been divided over some key policy issues, including what to do about a U.S. military base on the island of Okinawa, there is a near unanimous view among ministers that the BOJ should do more for the economy. But it is unclear whether cabinet members all want the same thing.
Banking Minister Shizuka Kamei, known for his anti-market rhetoric, has been the most strident critic and on Tuesday said the central bank was 'asleep at the wheel as usual'. Kamei is the leader of a tiny coalition party known for advocating drastic, sometimes unrealistic, economic steps as a way to stir debate.
Fujii has greater respect for the BOJ's independence, backing its decision to withdraw some of the steps it took to support the credit market due to the financial crisis. But on Tuesday, Fujii said monetary policy was responsible for price trends and fiscal policy could not be the main tool to make up for Japan's lack of demand.
Hatoyama has said little about the BOJ's monetary policy.
IS THIS SORT OF PRESSURE ON THE BOJ UNPRECEDENTED?
Not really. Previous governments have often put pressure on the BOJ whenever the economy faltered and have tried to make the central bank a scapegoat for economic troubles.
Hatoyama's government, which is largely untested in fiscal policy, has adopted the kind of heavy-handed approach towards the BOJ that governments under the long-ruling conservative Liberal Democratic Party used to influence monetary policy.
The BOJ has avoided a direct confrontation with the government, but Governor Shirakawa said last week that a lack of demand should be blamed for sustained price falls, adding prices would not rise just through pumping more money into markets when demand itself was weak.
HOW MUCH INFLUENCE DOES THE GOVT HAVE OVER THE BOJ?
The BOJ is independent by law but the government can still wield some influence over monetary policy. The government picks candidates when vacancies arise on the BOJ policy board, including the governor, who then need parliamentary approval to be appointed.
BOJ policy board members, including the governor, cannot be replaced except where they have been convicted of a crime or they have been deemed incapable of working because of illness. The governor appears before parliament routinely to answer questions.
Two government representatives sit in on policy meetings. They cannot vote but can request a delay in the board's votes on policy decisions, although the BOJ can disregard such requests. The last time the government took that step was in 2000, but the BOJ rejected the request and raised rates.
Government rebukes could spur market expectations for a future monetary policy shift. Once that happens, it would make it harder for the BOJ to go against such expectations.
(Additional reporting by Satomi Noguchi; Editing by Dean Yates)
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