Central bankers and finance ministers from the Group of Seven richest industrialised nations are due to convene in the US capital at the end of the week as concerns grow over the economic impact of the war in Iraq and the global outbreak of a new deadly strain of pneumonia.

Fukui, who took office on March 20, the day the US-led attack in the Gulf began, seems more willing to act quickly to combat Japan's economic woes than his predecessor, Masaru Hayami, analysts said.

The conservative thinker who has already spent 40 years working at the Bank of Japan (BoJ), has expressed a willingness to converse directly with the government and open a debate in the central bank itself, they added.

On his fourth day on the job, he called an emergency policy board meeting for the following day -- the first meeting of its kind since the BoJ law was changed in April 1998 to give the bank more independence.

Fukui directed his staff to come up with "a wide range of issues related to the enhancement of monetary policy transparency and the strengthening of the monetary policy transmission mechanism" particularly in "the areas of corporate finance and money market operations."

"I think that Mr. Fukui will put a very impressive first foot forward," said Paul Sheard, chief economist in Asia for Lehman Brothers, adding: "The initial signals are very positive."

John Richards, bond market strategist with Barclays Capital, said he sensed "that he will be more aggressive and the timeframes of his policy moves will be shortened" compared to Hayami.

With the words "reinforcing the transmission mechanism", the new governor has clearly shown his willingness to engage in a process that will see the liquidity of the central bank, long trapped in the banking system, flow to small and medium-sized firms.

His determination on the issue could be at the centre of his address to the G7, where each member will be asked for fiscal and monetary policies that support the global economy in the coming months faced with the consequences of the war in Iraq and spread of Severe Acute Respiratory Syndrome (SARS), said Masaaki Kanno, chief economist at JP Morgan.

The BoJ announced Tuesday it would consider expanding purchases of securities in its open market operations to asset-backed commercial paper, particularly those issued by small- to medium-sized companies. "(The) outright purchase of private debt is an unprecedented measure for a central bank," it said in a statement, after a regular two-day board meeting.

In this way, the BoJ would attempt to break the "liquidity trap" in a country where lending to businesses has been declining for several years.

"Money in Japan is not moving from the banks into the corporate sector," said Sheard. The central bank pumps liquidity into the market by buying Japanese Government Bonds (JGBs), and banks, rather than lend to small companies in great need of loans, also use most of the funds to purchase low-risk JGBs.

As for more radical measures to fight deflation, Fukui has already expressed his opposition to inflation targeting, dubbed a "reckless gamble" by his predecessor, who feared it could result in uncontrolled price increases.

"Such obstinacy is berated as worrying about a fire while standing chest deep in a flood," said Ryutaro Kono, chief economist at BNP Paribas.

In February, prices fell from a year ago for the 42nd straight month, representing a deflationary trend which has hurt corporate profits and stifled demand.

The refusal to set an inflation target, according to Kono, stems from a determination to maintain the stability of long-term interest rates, which are extremely low in Japan.

Higher interest rates, which would be caused by inflation, would result in lower prices in the bond market. Japanese banks would see the value of their massive JGB holdings fall, bursting what some economists call the "last bubble" of the Japanese economy.

But Japan and its partners will also try to learn from each other, as Germany's deteriorating economic situation raises fears of the West catching the deflation bug which has plagued Asia, Kanno and Sheard said.

SPACE.WIRE