Bank of Japan Governor Haruhiko Kuroda on Thursday endorsed government plans to compile a fiscal spending package for disaster relief and measures to help the economy stave off heightening global risks.
The challenges posed by a string of recent natural disasters and the potential hit to Japan's economy from slowing overseas growth "should be better be addressed by government with fiscal policy and structural policies," Kuroda said in a seminar.
"At the same time ... fiscal space for Japanese government is somewhat limited, so wise spending is required," he said.
With major central banks having used up most of their ammunition to reflate growth, fiscal policy is drawing global attention as a more useful tool to stave off another recession.
In Japan, politicians are piling pressure on the government to compile a big spending package, increasing the chance fiscal policy could play a bigger role in sustaining a fragile economic recovery with the risk of more debt issuance.
Kuroda said a mix of fiscal and monetary stimulus measures was a standard way to support the economy, and something the BOJ was already doing by keeping borrowing costs low under its yield curve control (YCC) policy.
"YCC, which intends to maintain short- and long-term rates quite low, would make fiscal policy even more effective," he said. "But our monetary policy will continue to be guided by our major objective, that is to achieve price stability and keep financial stability."
As Japan is prone to big typhoons and earthquakes, Kuroda highlighted the risk related to climate change as an example of new issues central banks must deal with in maintaining financial stability.
Natural disasters, such as the strong typhoon that struck Japan in October, may erode asset and collateral value, and the associated risk may pose a significant challenge for financial institutions, Kuroda said.
"Climate-related risk differs from other risks in that its relatively long-term impact means that the effects will last longer than other financial risks, and the impact is far less predictable," he said. "It is therefore necessary to thoroughly investigate and analyse the impact of climate-related risk."