Plans by Japan's prime ministerial front-runner to force the central bank to buy government bonds were criticised Monday as potentially "devastating" for the whole economy.
Shinzo Abe, the leader of main opposition Liberal Democratic Party, told supporters at the weekend he would make the Bank of Japan participate in the scheme -- effectively printing money to generate inflation.
Japan has been mired in deflation for years, a situation that discourages consumers from spending in the knowledge that products will be cheaper in the future, sapping demand and dissuading firms from investing.
"I want the Bank of Japan to buy all construction-related government bonds, whereby new money will forcibly circulate in the market," Abe said on Saturday.
Abe, a one-time premier who was re-elected as leader of the LDP last month said he would pursue a policy of active spending and aggressive monetary policy, and would expect the central bank to follow suit.
"I want to pick a central bank governor who will support an inflation target" of between two and three percent, said Abe.
His comments come days after he pledged to call for "unlimited" stimulus measures if he won the December 16 general election.
Analysts rounded on the calls on Monday, saying they endangered the independence of the Bank of Japan and risked weakening fiscal discipline, possibly with disastrous effects.
"The purchase of government bonds is drastic medicine, a powerful drug that might work, but carries the risk of devastating the whole economy," said Yoshikiyo Shimamine, chief economist at Dai-ichi Life Research Institute.
The measure "would bring about an expectation for inflation... but with unease in the bond market and doubt about the sustainability of Japan's finances, it could only generate stagflation," he said, referring to a situation in which prices rise but the economy stands still.
"With market trust in Japan sinking, the yen could plummet, for instance, to 200 yen against the dollar" from around 81 yen on Monday, leading to a flight of foreign capital as the value of Japanese assets devalues, he said.
Hiromichi Shirakawa, analyst at Credit Suisse, said "what Abe wants the Bank of Japan to do is based on the LDP's policy of expanding public spending."
"Because the LDP wants votes from the (job-strapped) countryside, they plan to spend on public works projects, but with private saving of ageing Japan being unable to finance them, the only reliable money bag is the BoJ."
"So the question is two-fold: Isn't their programme simply pork-barrel politics? And is it really okay to rely on the BoJ to finance it?"
"If the BoJ is to finance the bond issuance, the government has to be ready to pay at maturity, and to me the only solution is, like Republicans say in the United States, to cut social welfare and medical costs," Shirakawa said.