Bank of Japan meets under pressure

By CNN's Alex Frew McMillan and wire reports

TOKYO, Japan -- The central Bank of Japan has begun two days of meetings under heavy pressure to do more to help the world's second largest economy.

With interest rates already virtually at zero, Bank of Japan (BOJ) Governor Masaru Hayami has resisted pressure from the government to ease monetary policy.

But there are signs Japan's already decade long slump is worsening. That has led lawmakers to lean a little more heavily on Japan's central bank.

A group led by Liberal Democratic Party member Kozo Yamamoto is now drafting legislation that would trim the power of the Bank of Japan (BOJ), as well as force it to set inflation target.

Yamamoto, a former finance ministry official, also proposes letting the government stall BOJ policy changes it doesn't like.

BOJ not expected to budge

The BOJ is independent in Japan but still trying to recover from a disastrous decision to raise interest rates at a time the economy was slowing.

It is not expected to change monetary policy at this week's meeting. But each new figure out of Japan seems to paint a bleaker picture.

On Monday, new figures showed the country's current account surplus shrank for the seventh month in a row.

For June, the current account balance -- the difference between how much Japan sells and trades abroad versus how much it imports -- dropped 40.5 percent for June over a year ago.

Thanks mainly to weak exports, it stood at $6.3 billion (771.2 billion yen), the Ministry of Finance said.

Capital spending, which held up well at the start of this year, is also cooling.

Japanese officials have admitted the country is likely in its second down quarter -- the definition of a recession. That's likely to become official when the next set of gross domestic product figures come out in September.

IMF cuts assessment

The International Monetary Fund said on Friday it expects Japan's economy to shrink 0.2 percent this year. It had earlier forecast growth of 0.6 percent.

The IMF worries that "Japan could re-enter a cycle of slowing activity, rising bankruptcies, and a deteriorating banking system, which would, in turn, exacerbate the global downturn," it said in its annual assessment.

Despite that weakness, Japanese Prime Minister Junichiro Koizumi continues to push ahead with reforms. On Friday, his cabinet approved record budget cuts for Japan, a preliminary set of guidelines that will be shaped the rest of the year.

Koizumi warns that the reforms will mean pain for Japan, in the form of higher bankruptcies and unemployment.

Economists say the leader's plans of trimming government spending and forcing Japan's battered banks to write off loans are good ideas. But some worry that the push is coming at a time that Japan's faltering economy needs extra help, not belt tightening.

Japanese stocks were taking a hammering Monday, with the Nikkei down 2.1 percent at 11,491.30, depressing markets throughout Asia.

Reuters contributed to this report.