US ambassador Thomas Foley told Reuters Television that the his country had not urged any specific monetary policy moves, but the dollar drifted higher and government bond prices rose on speculation that the Bank of Japan (BoJ) might act soon. The central bank holds a policy board meeting on Friday, and Japanese markets are closed on Thursday for a national holiday.

Financial markets have been obsessed by a heated debate over whether the BoJ should open its monetary policy tool box to curb rising long-term interest rates and prop up Japan's limping economy. The recent rise in long-term interest rates, which could dampen already feeble corporate spending, has been driven by an expected increase in government bond issuance needed to fund Japan's mammoth stimuluspackages.

That rise prompted politicians to pressure the BoJ to consider controversial steps including either directly underwriting Japanese government bonds (JGBs) or expanding their purchases of JGBs in the secondary market.The central bank-which has little scope for conventional easing given an official discount rate at a record low 0.5 percent--has come out against both steps and some senior ruling party politicians have rejected the idea of direct JGB underwriting as irresponsible. A senior member of the Liberal Party, joined with the ruling Liberal Democrats in a coalition government since January, told Reuters Television that the BoJ should buy JGBs while reducing its holdings of short-term financial bills (FBs) from April, when the latter will be sold via competitive price auctions.

The suggestion by Liberal policy Chief Yoshio Suzuki, a former BoJ executive, echoed one by finance minister Kiichi Miyazawa for such "twist operations" last week. "In order to keep money market conditions very easy,buying operations for other assets such as long-term government bonds will be necessary" (after April), Suzuki said.

Former BoJ Deputy Governor Toshihiko Fukui told Reuters Television later that direct JGB underwriting by the BOJ was "out of the question."