Japanese Prime Minister Shinzo Abe made his biggest push yet to make jobs growth part of the Bank of Japan's mandate as his government approved $111 billion of spending to revive the economy in the largest stimulus since the financial crisis.

Under intense pressure from Abe, the BoJ will likely adopt a 2 per cent inflation target at its January 21-22 rate review, double its current goal, and consider easing monetary policy again, most likely by increasing government debt and asset purchases, sources told Reuters this week.

Japan's current account, which is normally in surplus, swung to a rare and hefty deficit in November, which helped push the yen to a 2-1/2 year low against the dollar and highlighted the need to support the economy as exports weaken.

Abe's recipe to jolt Japan from years of deflation and stop-start growth is big fiscal spending and central bank purchases of government debt, but there are risks as Japan's debt burden is already the worst among major economies.

"Bold monetary easing is essential in beating deflation and a strong yen," Abe said as he unveiled direct spending worth 10.3 trillion yen ($111 billion) on public works, incentives for corporate investment and financial aid for small firms.

Taken together with spending by local government and private-sector firms, the size of the entire stimulus package was 20.2 trillion yen, according to government officials.

BOJ wants flexibility

Abe has made aggressive monetary policy to end almost 20 years of deflation a top priority after his Liberal Democratic Party (LDP) won elections last month.

"I want the BOJ to keep maximising employment at the forefront of its thoughts," Abe was quoted in the Nikkei newspaper on Friday.

He also told the paper that the BOJ should have a short-term goal of getting inflation to 2 per cent, saying such a target would be meaningless if it had a long-term timeframe.

BOJ and government officials are negotiating a joint statement to be issued after the central bank's policy meeting, which sources say will likely include 2 per cent inflation as the bank's new policy target and a pledge to continue with aggressive monetary easing to beat deflation.

The BOJ is strongly opposed to adding job growth to its mandate for fear of binding its hands on future policy, although it may accept a phrase in the statement that creating more jobs would be a shared objective with the government.

"I think the BOJ can respond to Abe's calls on employment within the existing framework of the BOJ Law by placing a little more emphasis on employment in its forecasts," said Hiroshi Miyazaki, chief economist at Shinkin Asset Management in Tokyo.

"But when it comes to inflation, it's really hard to get consumer prices to rise 2 per cent in the short term. Prices lag the economy by about a year and we've been in recession since last year."

Despite Abe's comments in the Nikkei that the inflation target was meaningless as a long-term goal, sources familiar with the negotiations said the statement was not likely to set a specific deadline for achieving 2 per cent inflation.

The BOJ hopes to stress in the statement the inflation target is a long-term goal and won't be achieved unless monetary easing steps are accompanied by government efforts to boost growth potential such as deregulation, the sources said.

"We'll build a framework for strengthening cooperation between the government and the Bank of Japan. We strongly expect the BOJ to conduct aggressive monetary easing with a clear price target," the government said on Friday.

"In addition, we continue to keep close watch on currency markets and respond as appropriate."

The government expects the stimulus to raise a real economic growth by 2 percentage points and create 600,000 jobs.

To fund the spending, it will sell around 5 trillion yen more bonds than originally planned for the current fiscal year, a government official said.

The government's plans for more public works spending has taken its toll on the bond market, causing yields to rise steadily since last month's election.

The yen, which has been tumbling since November on expectations for more monetary easing, reached 89.35 per dollar on Friday, its weakest level since June 2010.

The current account posted a 222.4 billion yen deficit in November, the first shortfall in 10 months and well in excess economists' median forecast of 3.5 billion gap.

Analysts had expected the deficit to be just one-off and the account - the measure of the nation's trade, income and transfer flows - to return to surplus in coming months with exports and investment income expected to benefit from recovering global economy and a weaker yen.

But the wide gap cast some doubt on such predictions and will add to the pressure on the BOJ to continue easing policy to try to reinvigorate the economy.

Reuters