TOKYO (Reuters) ? The Bank of Japan eased monetary policy on Thursday by boosting purchases of government bonds, saying it acted in response to risks posed by a strong yen and Europe's debt crisis to the world's third-largest economy.
The central bank topped up its asset buying program to 20 trillion yen ($263 billion), an increase of 5 trillion yen, while keeping the policy rate at 0-0.1 percent, delivering its second monetary stimulus in three months.
Japan's economy has been recovering from the devastating March earthquake and until recently its central bankers appeared reluctant to ease policy further, counting on fiscal spending on reconstruction and demand from emerging markets to sustain the upturn.
European leaders on Thursday agreed on a comprehensive package of measures to tackle the euro zone's sovereign debt crisis, offering some relief to Japanese policymakers who worry that the crisis may start to hurt their economy as well as emerging Asian nations that are key markets for Japanese goods.
However, the yen's renewed climb to record highs, threatening exports, and lingering doubts whether Europe's agreement this week will lead to a lasting solution to its debt crisis swayed the BOJ board in favor of more action.
"Current yen rises are having a big negative impact on Japanese corporate sentiment and exports," Governor Masaaki Shirakawa told a news conference.
In a rare development at the consensus-minded central bank, former academic Ryuzo Miyao -- regarded as one of the most pessimistic board members -- voted against the move. He called instead for a bigger 10 trillion yen expansion of a broader 50-trillion-yen pool for asset buying and market operations.
Even if investors were not sure about the timing, the scale of the easing came as no surprise, and the yen -- buoyed by safe haven flows fueled by European debt jitters -- barely budged.
At 0700 GMT it traded around 75.82 to the dollar, just off its latest record high of 75.709 struck on Wednesday.
"Foreign investors may be disappointed that the BOJ didn't deliver something extra," said a senior trader for a Japanese bank.
Some analysts also voiced disappointment that the central bank had not acted more boldly.
"Bringing down long-term interest rates is effective in weakening the yen," said Hideo Kumano, chief economist at Dai-Ichi Life Research Institute. "The BOJ decided to focus on increasing JGB purchases this time, but why didn't they decide to buy JGBs with maturities exceeding two years?"
SLOWER, LESS CERTAIN RECOVERY
As expected, the central bank cut its growth forecasts for this fiscal year ending in March 2012 and the next year, while sticking with its view that the Japanese economy would continue a moderate recovery. The BOJ cut next fiscal year's growth forecast to 2.2 percent from 2.9 percent and predicted 1.5 percent growth in the following year, which would still make Japan one of the best performing major advanced economies.
But it also highlighted that overcoming deflation would take time and said a multitude of risks to such a scenario warranted monetary easing now.
The entire increase in the asset buying scheme will take the form of more purchases of government bonds with no increase in private debt, given corporate financing has shown little sign of strain, the BOJ said. In contrast to past expansions, the central bank did not extend the deadline for the purchases, suggesting it will be buying government debt at a faster pace.
Finance Minister Jun Azumi welcomed the BOJ's easing and described Europe's agreement on a 50 percent write-down of Greek debt as a "big step forward", after earlier repeating a customary warning that Tokyo might intervene in the currency market.
"We stand ready to take firm measures on currencies if necessary," he told reporters before the BOJ decision.
The BOJ previously eased policy by boosting its asset buying pool in August, acting in tandem with the Finance Ministry, which ordered Japan's biggest-ever single-day currency intervention, selling more than 4.5 trillion yen.
The impact proved short-lived, however, and the yen crawled back to trade close to its record highs.
This has been a source of deepening frustration for Japanese officials, who argue that a yen rally is one problem too many for a nation grappling with a nuclear crisis, a $250 billion post-quake rebuilding effort and ballooning debt.
($1 = 75.990 Japanese Yen)
(Additional reporting by Rie Ishiguro, Stanley White, Kaori Kaneko and Tetsushi Kajimoto; Writing by Leika Kihara and Tomasz Janowski; Editing by Edmund Klamann)
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