Bank of Japan in boldest attempt yet to revive economy

Tue Jan 22, 2013 11:47am EST
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By Leika Kihara and Tetsushi Kajimoto

TOKYO (Reuters) - The Bank of Japan announced on Tuesday its most determined effort yet to end years of economic stagnation, saying it would switch to an open-ended commitment to buying assets next year and double its inflation target to 2 percent.

It issued a joint statement with the government promising to reach the inflation goal "at the earliest possible time," drawing praise from Prime Minister Shinzo Abe, who has piled relentless pressure on the central bank to take bolder measures to pull Japan out of deflation.

The decision to adopt asset buying with no end date had exceeded market expectations, analysts said. But Tokyo stocks .N225 fell and, after an initial selloff, the yen rose on investor disappointment that the expanded stimulus would not start until 2014. Five-year bond yields initially fell to a record low on the news, but then reversed direction.

"They've gone further than I thought by introducing the open-ended plan," said Joseph Capurso, currency strategist at Commonwealth Bank of Australia in Sydney.

"What surprises me is they won't start until 2014. That's very odd and different from what the Federal Reserve did, which was immediate," he said.

Having slashed interest rates close to zero, the BOJ's policy is the latest unorthodox effort by a leading central bank to try to boost an otherwise weak recovery from the global financial crisis and, in Japan's case, overcome more than a decade of deflation.

Abe led his Liberal Democratic Party to a landslide victory in December elections and his campaign for aggressive budget and monetary stimulus had pushed the yen lower and sparked a stock market rally on hopes a weaker currency would boost exports. He hailed Tuesday's BOJ action as a game-changer.

"It is 'epoch-making' in a sense of bold review of monetary policy," he told reporters.   Continued...

Bank of Japan Governor Masaaki Shirakawa (L) and Finance Minister Taro Aso attend a joint news conference with Economics Minister Akira Amari after their briefing to Prime Minister Shinzo Abe (not pictured) in Tokyo January 22, 2013. REUTERS/Kim Kyung-Hoon