Business News : BOJ boosts bond buying by 10 trillion yen, extends duration

TOKYO (Business News) - The Bank of Japan, facing mounting government pressure, eased policy further on Friday by boosting its asset purchases by 10 trillion yen ($ 124 billion), more than markets had expected, and said it would buy longer-term government bonds in a show of resolve to pull the economy out of deflation.

But in what might serve to cool expectations of further aggressive easing, it said it would not take "too long" for consumer price inflation to reach the central bank's 1 percent target.

It also said that it has become increasingly evident that the world's third-largest economy was shifting towards recovery.

The yen fell against the dollar, as many domestic players had bet on a more cautious 5 trillion yen move.

The central bank also surprised some market watchers by saying it will buy more riskier assets: exchange traded funds (ETF) and real-estate linked funds (REITs).

Markets will now focus on comments from Governor Masaaki Shirakawa's briefing due out after 3:15 a.m. EDT for any hints about the central bank's future course of action.

"The BOJ did a little b it more than we had expected, so their decision comes as a positive surprise. We didn't expect they would increase purchases of ETFs and REITs," said Masamichi Adachi, senior economist at JPMmorgan Securities in Tokyo.

"The bank is trying to send a message that they are supporting the market and the economic recovery, just like they did in February. It is a step in the right direction and we think the BOJ needs to do even more to further boost the economy."

The BOJ's second easing in just over two months comes despite signs of an economic recovery and was widely seen as a response to political pressure for greater efforts to end deflation that has dogged Japan for over a decade, depressing consumption and business investment.

Borrowing costs are already low, with two-year bond yields trading at BOJ's overnight rate target ceiling of 0.1 percent, so pumping in more m oney is seen as a largely symbolic move which will do little to directly spur the economy.

With its unanimous decision to expand its asset buying pool to 40 trillion yen, the central bank gave itself more time to hit the targets of extending the duration of the asset buying and lending scheme by six months to mid-2013.

It said it would extend the duration of Japanese government bonds targeted under its asset buying scheme to three years from the current two years, as had been widely expected.

The BOJ also expanded the size of its fund for asset buying and market operations backed by collateral by 5 trillion yen to 70 trillion yen.

Friday's move also appeared to be aimed at keeping the yen in check by reinforcing market expectations of continued new supply of the currency.

LOOKING UP

In a sign of the economy's resilience, factory output rose in March at the fastest pace in three months as exports picked up. But the 1 percent rise undershot expectations and companies expected to cut production next month.

Consumer prices rose just 0.2 percent in March from a year earlier in a sign Japan still had a long way to achieve the BOJ's 1 percent target, which the central bank believes is consistent with its idea of price stability.

Because of the impact on the yen and the currency's importance for Japan's export machine, analysts say that the BOJ found itself locked in a policy easing competition with the U.S. Federal Reserve and, to a lesser extent, the European Central Bank.

The Fed stood pat on policy earlier this week, but Chairman Ben Bernanke said the central bank would not hesitate to launch another round of govern ment bond buying if the U.S. economy were to weaken.

In such a scenario, the yen could rise again, threatening the economic recovery and putting the BOJ under pressure to act, too.

With interest rates virtually at zero, the BOJ has created as its main policy tool a pool of funds to buy government bonds with up to two years until maturity, as well as corporate debt and trust funds investing in property and shares.

The BOJ helped weaken the yen and lift stocks in February by boosting asset purchases by 10 trillion yen and setting the 1 percent inflation target. But lawmakers have continued to pile pressure on the BOJ with prices barely rising.

The BOJ will also release a twice-yearly outlook report on Friday with revised long-term forecasts that will shed more light on how long will it take to bring back moderate inflation.