Japanese Prime Minister Yukio Hatoyama and Bank of Japan Governor Masaaki Shirakawa will meet next week, two sources with direct knowledge of the matter said, as a surging yen adds to debate over central bank policy.

While the sources did not disclose the topic of discussion, Hatoyama and Shirakawa are expected to exchange views on deflation and the impact of a strengthening yen amid government pressure for the central bank to do more to stop prices falling and rekindle demand.

Speculation has been mounting that the BOJ may loosen monetary policy further through printing cash to buy more government bonds from the market in an attempt to reflate the economy, as some government politicians worry that deflation could push the economy back into recession.

The yen's rise to a 14-year high against the dollar has increased the pressure as it hurts Japan's big manufacturers whose exports are the key driver of economic growth, and accelerates deflation by pushing down import prices.

National Strategy Minister Naoto Kan said on Friday the government has been in touch with the BOJ, and that the two will act together to deal with the yen's rise.

The government is expected to include measures to help ease the pain from the yen's rise on exporters in an extra stimulus budget, which Japanese media said will come out next week.

Hatoyama's government is only two months old and is largely untested in fiscal policy. But it has adopted the heavy-handed approach toward the BOJ that previous governments have used to influence monetary policy.

The government has criticized the BOJ's economic assessment as too rosy and called on the central bank to do its part to support the economy, although it has been vague on what it exactly wants the bank to do.

The BOJ has argued that when demand is weak, there was little it can do to push up prices beyond keeping interest rates low.

But with the government sharpening its rhetoric, the BOJ may eventually have to buy more government bonds, or return to its quantitative easing policy of flooding markets with excess cash, analysts say.

Shirakawa may explain his views on deflation and the yen's rise when he speaks to business leaders in Nagoya, central Japan, and holds a news conference on Monday.

The BOJ forecast three years of deflation in a twice-yearly economic outlook report issued after the October 30 meeting, effectively pledging to keep interest rates near zero for as long as necessary to underpin the economy.

Japan recorded its deepest deflation since 2001 in the year to October, excluding volatile food and energy prices, with increasing signs that weak demand is weighing on prices.

The yen shot up to a 14-year high against the dollar on Friday, prompting the Japanese currency authorities to check rates with traders but analysts say there is little the government could achieve through intervention in the face of a broad dollar retreat.

(Reporting by Sumio Ito, writing by Leika Kihara; Editing by Rodney Joyce)

Japan Inflation Quantitative easing Bank of Japan