By Leika Kihara
TOKYO (Reuters) - Political pressure on the Bank of Japan to expand stimulus on Friday is intensifying with the economy minister calling on the bank to work with the government to boost economic growth.
Prime Minister Shinzo Abe sent a "powerful message" by announcing a 28 trillion yen ($267 billion) stimulus package on Wednesday, Economy Minister Nobuteru Ishihara was quoted as saying by Japanese media hours after the announcement.
The figure was larger than markets had expected.
"I think people at the BOJ will take that into account and make an appropriate decision. I think (BOJ Governor Haruhiko) Kuroda understands that the world is watching," he said in a television appearance on Wednesday evening, the Kyodo news agency reported.
The remarks suggest the earlier-than-expected announcement of Abe's economic package was an attempt by the government to pressure the BOJ into expanding stimulus at a two-day rate review ending on Friday.
"Abe's announcement is a squeeze play on the BOJ. The BOJ has to move now. It is unavoidable," said Hiroaki Muto, an economist at Tokai Tokyo Research Center.
"There is a growing sense that the BOJ cannot move the market on its own, which is part of the reason why the government wants to combine fiscal and monetary policy."
Abe's announcement of the package boosted Japanese stocks on Wednesday and reinforced market expectations that the BOJ will match fiscal stimulus with another dose of monetary expansion.
But the package is inflated by 15 trillion yen of loans from quasi-government financial institutions, loan guarantees and subsidies to private firms, sources briefed on the matter told Reuters.
Direct fiscal spending would be only around 7 trillion yen, just a quarter of the total package, the sources said, which could disappoint some market players expecting bigger outlays.
Another 6 trillion yen will be for a fiscal loan and investment program aimed at spurring private-sector spending such as for construction of a "maglev" train line.
Japan's Nikkei average declined more than 1 percent on Thursday as the initial hype over Abe's package fizzled. The market's attention is now squarely focused on the BOJ.
There is near-consensus in markets the BOJ will sharply cut its inflation forecasts and further ease policy by expanding its already massive asset-buying program and possibly cutting interest rates deeper into negative territory.
But the central bank appears in little mood to deploy radical steps to overwhelm hyped-up market expectations, even if it were to ease.
Many BOJ policymakers prefer to hold off on easing on Friday, worried about the growing risks of further asset purchases, which are drying up bond market liquidity.
But Ishihara's remarks suggest that political considerations may nudge the BOJ into action, even as it struggles to revive the economy with dwindling ammunition.
Sources familiar with the deliberations say finance ministry officials have been pressuring the BOJ behind the scenes to ease on Friday to drive borrowing costs even lower.
Kuroda, a former finance ministry bureaucrat, has ruled out the chance of adopting "helicopter money," or direct underwriting of public debt. But he has also stated there was "nothing wrong" in coordinating fiscal and monetary action to boost the effect on growth.
(Additional reporting by Takaya Yamaguchi, Stanley White, Tetsushi Kajimoto and Minami Funakoshi; Editing by Eric Meijer and Kim Coghill)