BOJ Adds Stimulus, Sets 1% Inflation Target

Japan’s central bank unexpectedly added 10 trillion yen ($128 billion) to an asset-purchase program and set an inflation target after an economic slide fueled criticism it has been slower to act than counterparts.

An asset fund was increased to 30 trillion yen, with a credit lending program at 35 trillion yen, the Bank of Japan said in Tokyo today. The BOJ also said that it will target 1 percent inflation “for the time being.”

Stocks rose and the yen weakened against the dollar as the central bank expanded stimulus for the first time since October to revive an economy that shrank an annualized 2.3 percent last quarter. Lawmakers had urged extra efforts to counter deflation after the Federal Reserve adopted a 2 percent inflation target and the European Central Bank expanded its balance sheet.

Today’s decision “shows the BOJ bowed to political pressure,” said Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management Co. in Tokyo. “There will probably be limited impact on the yen’s gains.”

The overnight lending rate stayed between zero and 0.1 percent. Twelve of 13 economists anticipated no change in stimulus or rates.

Japan’s bonds rose, sending the yields on five-year securities down two basis points, or 0.02 percentage point, to 0.32 percent as of 3:56 p.m. in Tokyo, matching the lowest since November. The benchmark 10-year yield also declined two basis points to 0.96 percent.

The BOJ’s price framework is similar to that of the Federal Reserve, Shirakawa said at a press conference in Tokyo today. He also said easing wasn’t in response to government pressure.

The yen traded at 77.96 per dollar as of 5:05 p.m. in Tokyo, from 77.60 before the announcement and compared with a post World War II high of 75.35 in October. The currency’s strength is hurting exporters such as Sony Corp. (6758), which has more than doubled its annual loss forecast to 220 billion yen. The Nikkei 225 Stock Average closed 0.6 percent higher.

Shirakawa and his colleagues acted three times last year to expand asset purchases by a total of 15 trillion yen, efforts that didn’t halt yen gains.

Lawmakers had invoked the Fed’s inflation target as evidence that their own central bank was failing to do enough. “Japan is sending a message we are OK with deflation,” Yuichiro Uozumi, a member of the No. 2 opposition party, told Governor Masaaki Shirakawa on Feb. 7 in Tokyo.

The BOJ’s stated understanding of price stability has been from above zero to 2 percent, centered on 1 percent. Today the policy board said it had “decided to set a goal of 1 percent for the time being to clarify the inflation rate which the bank’s monetary policy aims to achieve.”

“Compared to the ECB’s definition of price stability or the Fed’s price target, the BOJ’s clarification still seems vague,” said Junko Nishioka, a Tokyo-based analyst at RBS Securities Japan Ltd.

Prices haven’t risen at least 1 percent for any year since 1997 and the economy now faces drags ranging from weakness in global demand to shutdowns of nuclear power plants after last year’s March 11 earthquake and tsunami, which left more than 19,000 people dead or missing.

“We welcome the BOJ’s policy measures, which are aggressive steps intended to beat deflation,” Finance Minister Jun Azumi said in Tokyo today. “I hope the BOJ’s bold monetary easing gives a boost to the economy.”

Elsewhere around the world, a report today may show that euro area industrial production fell 1.2 percent in December from a month earlier, according to the median estimate of economists.

Sales at U.S. retailers probably rose in January by the most in four months, led by growing demand for autos, economists said before a report today. The projected 0.8 percent increase would follow a 0.1 percent December advance, according to the median forecast of 82 economists.

In Japan, the economy shrank more than analysts forecast in the fourth quarter, a report showed yesterday. RBS Securities Japan Ltd. forecasts that gross domestic product will expand 1.6 percent this quarter and JP Morgan Securities has estimated 1.8 percent growth as reconstruction work kicks in.

This week’s BOJ meeting was the first since Economy Minister Motohisa Furukawa said that the central bank may need to improve communication of its stance on prices.

In a statement, the central bank said it aimed to “clarify its monetary policy stance and to further enhance monetary easing” to “overcome deflation and achieve sustainable growth with price stability.” The increase in the asset-purchase facility will fund purchases of more government bonds, the central bank said.

The Fed and BOJ have signaled differences over the ability to control long-run rates of change in prices. Fed policy makers said last month that “the inflation rate over the longer run is primarily determined by monetary policy.”

By contrast, Shirakawa has for years indicated that the BOJ cannot achieve its inflation target on its own. He said at a business conference Jan. 29, 2010, that lack of demand was the “root cause of deflation” and there was no “magic wand”

The government has compiled four supplementary budgets for reconstruction this fiscal year, a step unseen since 1947. The biggest boost from about 20 trillion yen of measures should be in the first half, economist Yuichi Kodama said.

“Public spending and reconstruction demand will really kick in while the global demand will help propel the economy,” Kodama, chief economist at Meiji Yasuda Life Insurance Co. in Tokyo., said before the BOJ statement.