Bank of Japan boosts stimulus for sagging economy, markets unimpressed

Tue Oct 30, 2012 5:33am EDT
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By Leika Kihara and Stanley White

TOKYO (Reuters) - The Bank of Japan boosted its monetary stimulus for the second month in a row on Tuesday in response to intense political pressure for action and mounting evidence that the world's third-largest economy was on the cusp of recession.

In a well-flagged move, the central bank topped up its asset buying and lending program, its main monetary easing tool, by 11 trillion yen ($138 billion) to 91 trillion, broadly in line with what markets had factored in.

As a result the yen firmed and benchmark 10-year bonds erased earlier gains driven by some speculation that the BOJ might choose to surprise with more aggressive action.

It was the first time since 2003 that the conservative BOJ has eased policy for two months in a row. In another rare move, the central bank issued a joint statement with the government pledging their combined efforts to pull Japan out of deflation.

Stepping further into unorthodox territory, the BOJ also unveiled a plan to supply banks with unlimited amount of cheap, long-term funds under a new scheme initially seen sized around 15 trillion yen.

But neither the BOJ's stronger language nor its new scheme managed to impress analysts, who expect pressure for more monetary easing to persist.

"The problem is not banks' ability to lend. The problem is a lack of demand for loans due to deflation and a high exchange rate," said Masayuki Kichikawa, chief Japan economist at Bank of America Merrill Lynch in Tokyo. "The markets will continue to expect more from the BOJ."

BOJ Governor Masaaki Shirakawa acknowledged that worsening signs in overseas economies were the key trigger for the latest easing, which followed a similar-sized stimulus worth just over 2 percent of Japan's GDP, in September.   Continued...

A man works in front of cranes at an industrial area in Tokyo October 30, 2012. REUTERS/Toru Hanai