The country's Economic Planning Agency (EPA) chief was the latest official to step into the dispute when he said parliament favoured higher interest rates. "There are stronger calls for raising (the official discount rate) than cutting it when you listen to discussions in parliament," EPA minister Koji Omi told reporters after a regular cabinet meeting. Japan's discount rate is already at a historic low of 0.5 per cent. Omi's comments followed remarks by a senior Bank of Japan (BOJ) official on Thursday that suggested the central bank may be considering a rate cut.

BOJ deputy governor Yutaka Yamaguchi raised eyebrows when he said a further credit easing would on balance be positive for the economy, although he added that it would also have side effects. Separately, Kazuo Ueda, a member of the BOJ's policy board, told ReutersTelevision last week that he would like to see a cut in Japan's official discount rate, but only if economic conditions worsened.

But many lawmakers have called on the central bank to raise interest rates even though many private economists believe the economy will contract this year.

The lawmakers argue that low rates are depriving citizens -- especially pensioners -- of interest income, which is also quashing their enthusiasm to spend.

Critics say that argument is politically motivated. With a key Upper House election looming in July, a rate increase engineered by the Liberal Democratic Party would help the party retain its control of parliament, they say. And some say neither raising nor lowering rates will have a positive impact on the economy.

Trade minister Mitsuo Horiuchi told a news conference that even if the central bank was to make a change in monetary policy, whether it be a rate rise or rate cut, it would be ineffective as banks still burdened by large amounts of bad loans would notbe able to respond in a normal manner. "Even if the commander-in-chief was to give an order, financial institutions are in disarray," he said. "If the troops are not able to move, then there will be no effect."

About the only people not confused by the rate talk machinations are traders in Japanese government bonds (JGBs). Bonds surged to record levels for a sixth consecutive day on Friday, discounting Omi's comments to focus on the prospect of lower rates.

"I think the BOJ is seriously considering what the effects of a rate cut would be," said Jun Fukashiro, a fund manager at NCB Investment Management. "They are considering it as a possibility." The yield on the benchmark 182nd government bond slipped to 1.320 per cent at one point on Friday -- a level believed to be the lowest long-term rate ever. Key June futures rocketed briefly to a record high of 132.56.

Lower rates boost the bond market by making the higher yields on longer maturities look relatively more attractive. "There is rampant rate cutspeculation," said a dealer at a European securities house. "Unless someone comes out and puts a cap on this speculation, bonds will continue to rise."