BOJ signals more aggressive policy, sets inflation goal

Tue Feb 14, 2012 6:33am EST
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By Leika Kihara

TOKYO (Reuters) - The Bank of Japan boosted its asset buying program by $130 billion on Tuesday and in the face of political pressure set an inflation goal of 1 percent, signaling a more aggressive monetary policy to pull an ailing economy out of deflation.

Bond futures jumped and the yen fell as the decision pointed to much faster asset buying in the central bank's most determined effort to date to reinflate an economy that shrank last year and which has struggled with deflation for most of the last two decades.

The central bank kept its policy rate in a range of zero to 0.1 percent and pledged not just to maintain zero rates but to continue buying assets until 1 percent inflation is foreseen.

But coming after government calls for action, some analysts worried the policy easing undermined the central bank's independence and left it open to further pressure from lawmakers, especially if more aggressive U.S. monetary stimulus exerts fresh upward pressure on the yen.

"The BOJ apparently bent to political pressure, leaving the market with the impression of its vulnerability," said Yuichi Kodama, an economist at Meiji Yasuda Life Insurance.

"If the Fed embarks on additional easing, the BOJ is likely to come under pressure again and again and it may tweak its asset purchase scheme and start buying government bonds with longer maturities."

In a move that surprised markets, the central bank added 10 trillion yen ($130 billion) to its 20 trillion yen pool of funds set aside to buy assets. The new money is earmarked entirely for long-term government bonds.

The BOJ said it will set consumer inflation of 1 percent as its price goal for the time being, a clearer commitment to end deflation. It had previously defined 1 percent inflation as its "understanding" of long-term price stability.   Continued...

<p>Bank of Japan Governor Masaaki Shirakawa speaks during a news conference at its headquarters in Tokyo February 14, 2012. Shirakawa said on Tuesday that Japan's economy is headed towards a moderate recovery but the outlook remains highly uncertain. REUTERS/Toru Hanai</p>