Japan's government put pressure on the central bank on Tuesday to avoid ending its emergency funding for companies too soon, with the finance minister saying the economy had yet to regain balance.

The warning from two ministers about the risk of premature withdrawal of emergency aid followed a newspaper report that the Bank of Japan was preparing to let some measures expire in December as markets return to normal.

Central bank board member Atsushi Mizuno told Reuters he believed there was still a need for lending against corporate bonds as collateral. However, his comments suggested that other measures, such as commercial paper and company bond buying, might be phased out without causing much market disruption.

There is less demand for the CP and corporate bond buying operations, and the (BOJ) holdings of this debt have decreased, Mizuno said in an interview. On the other hand, there is strong demand for special operations aimed at backing corporate finance.

The Nikkei business daily said the central bank was expected to decide by Oct. 30 whether to keep its emergency funding, but discussion could continue into November.

The apparent pressure from the government will likely make it difficult for the BOJ to end its corporate-finance support measures in December, said Hiromichi Shirakawa, chief economist at Credit Suisse in Tokyo.

Finance Minister Hirohisa Fujii described the economy as unstable and said the central bank was at a stage where it should appropriately monitor the situation for corporate funding.

I firmly believe that (BOJ Governor Masaaki) Shirakawa will not do things that run counter to economic conditions, Fujii told reporters.

While not referring specifically to the central bank, National Strategy Minister Naoto Kan said optimism over the state of the Japanese economy was not warranted.

Financial Services Minister Shizuka Kamei was more blunt, telling reporters that it was too early for the central bank to discuss pulling the plug on its funding support.

Major central banks around the world are debating how to wind back the hefty interest rate cuts and cash injections put in place in the midst of the global financial crisis.

In the United States and elsewhere, central banks have started to wind down their buying of fixed-income securities as private investors flock back to credit markets and strains in short-term and longer-term lending markets ease.

Australia on Tuesday became the first economy among the Group of 20 nations to raise interest rates after slashing them during the crisis.

CREDIT MARKETS MEND

Mizuno, who ranked as a monetary hawk before the outbreak of financial crisis, but backed unorthodox steps to contain its fall-out, sounded a cautious note on the economic outlook and warned against haste in unwinding corporate funding support.

The BOJ needs to examine carefully individual market conditions, overall corporate finance, macroeconomic and price conditions, as well as how the temporary measures fit in with other policies, he said.

Japanese credit markets have been on the mend thanks in part to the BOJ's actions, with the average issue rate for one-month commercial paper falling to 0.21 percent in August from a peak of 1.34 percent last December.

BOJ chief Shirakawa signalled at a Group of Seven meeting of finance ministers and central bankers at the weekend that the end of the unconventional policies may be near, telling reporters corporate finance was in less need of policy support with credit market conditions improving significantly.

A BOJ survey showed last week that funding became easier for large companies in the past quarter, but small firms continued to struggle.

The bond market took the newspaper report and the ministers' comments in its stride.

Since banks' need for the BOJ's outright buying of commercial paper and corporate bonds has been diminishing, the bond market will likely take it calmly if the central bank ends the measures, said Naomi Hasegawa, senior fixed income strategist at Mitsubishi UFJ Securities.

It was unclear, however, to what extent the Bank of Japan would let itself be swayed by ministers' rhetoric.

The BOJ is independent. But the government does often give its opinion on BOJ policy and this will continue, said Adrian Foster, head of financial markets research for Asia-Pacific at Rabobank in Hong Kong.

Analysts were also not sure what to make of Kamei's comments and doubted whether the outspoken head of the junior coalition partner People's New Party and a harsh critic of bare-knuckles capitalism, represented the whole cabinet's line.

(Prime Minister Yukio) Hatoyama is trying to create a system of decision-making led by the prime minister and the cabinet, said Katsuhiko Nakamura, director of research at think-tank Asian Forum Japan. But it is not yet unified, and this is evidence of that.

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