FUKUOKA: Japan's government must heed the warning on soaring debt loads stemming from the turmoil of Greece's credit-rating downgrade, a Bank of Japan board member said.

The example of Greece, along with concerns about the credit quality of countries including Spain and Portugal, shouldn't be regarded as "a burning house on the other side of the river," Seiji Nakamura said in a speech in Fukuoka today. Nakamura also rejected the idea that further BOJ liquidity injections could end the country's bout with deflation.

Prime Minister Yukio Hatoyama's government has yet to lay out a plan to rein in Japan's record debt after Standard & Poor's cut the outlook for its sovereign credit rating last month. Nakamura's comments today also signal rising tension with the government after Finance Minister Naoto Kan urged the BOJ to be "flexible" in the fight against falling prices.

"BOJ policy makers feel they have to speak up to protect their independence," said Susumu Kato, chief economist for Japan at Calyon Securities in Tokyo. "A reduction of budget deficits isn't that high on the government's policy agenda."

Both central bank Governor Masaaki Shirakawa and his top economist Kazuo Momma said in the past week that there's no "magic" solution to overcoming price declines.

"Some people are arguing that deflation can only be overcome if the BOJ offers a massive amount of liquidity to private lenders," Nakamura said. "These arguments make it sound like there are instant remedies and ignore important tasks" Japan must undertake to bolster growth, he said.

Exacerbate Debt

Nakamura also said relying on fiscal stimulus to spur an expansion without having a strategy to cut public debt will only exacerbate the government's fiscal situation.

"Excessive dependence on emergency stimulus, which should be temporary, could cause significant problems in the future," Nakamura said. "Japan must reconsider policy measures to counter emergencies while also examining its fiscal- rehabilitation plans seriously in order to achieve stable and balanced growth."

The government responded to Standard and Poor's outlook cut by pledging to release an outline to contain growing debt by June, a month before Hatoyama faces an upper house election.

The Finance Ministry said last month national debt will probably swell to 973 trillion yen ($10 trillion) by March 2011, 8 percent more than the projection for this year. Japan's debt burden, approaching twice the size of the nation's economy, is the largest in the industrialized world.

'Wasteful' Spending

The government has been focusing on tackling deflation rather than cutting debt and wants to show voters they have cut "wasteful" spending as much as possible before raising taxes, compelling them to pressure the central bank to take action in the meantime, Calyon's Kato said.

Since lowering its benchmark interest rate to 0.1 percent in December 2008, the central bank has increased its purchases of government bonds and made it easier for companies to obtain funds. Shirakawa has said he can expand a 10 trillion yen lending program for commercial lenders unveiled in December if necessary.

Nakamura, 67, also today cast doubt on the bank's previous attempts to provide liquidity, noting that the 2001 quantitative easing policy only had a "limited" impact on easing deflation. He was referring to a policy implemented in 2001 where the central bank pumped cash into the banking system.

Funds the BOJ provided remained parked in commercial banks' accounts at the central bank and didn't flow through to the economy, Nakamura said.

Nakamura reiterated the bank will maintain an "extremely accommodative" policy stance to support the economic recovery, which he predicts may lose momentum in the middle of the year starting April 1 as the effect of policy stimulus fades.