The Japanese government on Monday vowed to work "decisively" with the Bank of Japan to prevent the adverse impacts of yen appreciation and deflation on the economy.

"The government will also make an utmost effort to prevent the economy from falling into vicious cycle between yen appreciation and deflation," the government said in a monthly report published by the Cabinet Office.

"The government will decisively work together with the Bank of Japan toward the exit from deflation which is the biggest challenge of Japanese economy in the short term," the report said.

Prime Minister Yoshihiko Noda held talks with Bank of Japan Governor Masaaki Shirakawa in Tokyo earlier on Monday as the yen gained further ground against euro amid worries over Spanish banking sector despite Eurogroup's approval of the bailout deal last week.

The euro fell below JPY 95 in Asian trade on Monday to its weakest level since November 2000. Meanwhile, Finance Minister Jun Azumi reportedly said that he is watching the currency moves closely and will take decisive steps to counter excessive yen gains.

Toward defeating deflation, reforming the economic structure predisposed to deflation is essential along with appropriate macroeconomic policy management, the government said in the monthly report.

Accordingly, it will deploy a broad range of policy measures intensively by fiscal 2013 "to mobilize goods, people, and money." The government said it expects the central bank to continue powerful monetary easing until the economy exits deflation. The BoJ has set an inflation target of 1 percent.

According to the report, movements toward sound economic recovery in the Japanese economy are expected to take hold in the short-term due to reconstruction demand. However, there are widespread concerns about further slowdown of overseas economies and a high degree of uncertainty persists about the prospects of the Eurozone debt crisis.

The report noted that these circumstances, including negative effects that could stem from sharp fluctuations in the financial markets are downside risks to the Japanese economy. Constraints of electric power supply is another risk to the outlook, it said.