The Bank of Japan governor urged the government on Tuesday to take steps on both revenue and spending as public finances are on an unsustainable path.
Haruhiko Kuroda, speaking in parliament, also told lawmakers that a planned increase in sales tax is among the steps needed as Japan struggles to contain its debt burden, which is proportionally the worst among major economies.
Continue Reading Below
Earlier this month, the BOJ agreed to double the government debt it holds to strengthen monetary expansion, but there are concerns the BOJ will end up bankrolling fiscal spending unless the government takes tough steps to reduce the debt burden.
"Public finances in their current state are unsustainable, so the revenue side and the spending side need to be addressed," Kuroda said in the lower house budget committee.
"I think the sales tax is a part of that."
Earlier this year, the BOJ and the government issued a joint statement in which the central bank agreed to pursue a 2 percent inflation target to end years of nagging deflation.
In the statement, the government also pledged to pursue sound fiscal policy, which many say is necessary to dispel fears that the government will use additional monetary easing as a license to spend more.
There's no change in the government's plan to raise the 5 percent sales tax to 8 percent next year, Prime Minister Shinzo Abe said in the same committee. Still, there are concerns that if Japan's economic outlook weakens, some lawmakers could try to derail this plan.
The BOJ stunned global financial markets earlier this month with a radical overhaul of monetary policy that will focus on expanding the monetary base to meet its inflation target in two years.
The BOJ will buy 7.5 trillion yen of long-term government bonds per month under its new policy framework, which accounts for roughly 70 percent of newly issued government debt.
Japan's proportional debt load is the worst in the world at more than twice the size of its $5 trillion economy, and little progress has been made over the years in reducing this burden.
(Reporting by Stanley White; Editing by Jacqueline Wong and Eric Meijer)