UPDATE 6-BOJ eases policy with eye on yen, Europe crisis

Thu Oct 27, 2011 5:41am EDT

* BOJ boosts asset buying to 20 trln yen
    * Policy rate steady at 0-0.1 pct
    * BOJ cuts growth forecasts, warns of risks
    * Board member Miyao sought bigger stimulus


    By Leika Kihara and Rie Ishiguro	
    TOKYO, Oct 27 (Reuters) - The Bank of Japan eased monetary
policy on Thursday by boosting purchases of government bonds and
warned of risks posed by a strong yen and Europe's debt crisis
in a sign it would act again if recovery in the world's
third-largest economy falters.	
    Spurred by the yen's renewed climb to record highs and
heightened overseas risks, the central bank delivered its second
monetary stimulus in three months by topping up its asset buying
scheme by 5 trillion yen to 20 trillion yen ($263 billion) while
keeping interest rates on hold near zero.	
    The BOJ also cut its growth and price forecasts, while
Governor Masaaki Shirakawa stressed various risks clouded the
outlook.	
    "Current yen rises are having a big negative impact on
Japanese corporate sentiment and exports," Shirakawa told a news
conference after the rate review.	
    "Global economic uncertainty, including Europe's debt
problem, remains very high, prompting global investors to seek
safe haven assets."	
    Japan's economy has been recovering from the devastating
March earthquake and until recently central bankers appeared
reluctant to ease policy further, counting on fiscal spending on
reconstruction and demand from emerging markets to sustain the
upturn.	
    An agreement struck by European leaders on Thursday on a
package of measures to tackle the euro zone's sovereign debt
crisis, offered some relief to Japanese policymakers who fear
the crisis may start to hurt their economy as well as emerging
Asian nations that are key markets for Japanese goods.	
    But the yen's strength and lingering doubts whether Europe
can produce a lasting solution to its debt crisis swayed the BOJ
board in favour of more action.	
    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 fuelled by European debt jitters -- barely budged.
It hovered around 75.88 to the dollar after the decision, just
off its latest record high of 75.709 struck on Wednesday.	
    Few analysts expect the BOJ to hold off on easing for long.	
    "The yen's uptrend won't change as it's driven by problems
in Europe and the United States. Monetary easing needs to be
coupled with currency intervention to be effective," said Mari
Iwashita, chief market economist at SMBC Nikko Securities.	
    "There's a chance the BOJ may (ease) again once or twice
more, such as by buying more assets including corporate bonds"
by March next year, she said.	
    In a rare development at the consensus-minded BOJ, former
academic Ryuzo Miyao -- regarded as one of the most pessimistic
board members -- voted against the move, seeking a bigger 10
trillion yen increase to a broader 50-trillion-yen pool for
asset buying and market operations.	
    	
    Some analysts said the BOJ was not bold enough.	
    "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 trimmed its growth forecasts
for this fiscal year to March 2012 and next, while sticking with
its view that Japan would continue a moderate recovery.	
    The BOJ cut next fiscal year's forecast to 2.2 percent
growth 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.	
    But 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.	
    The BOJ also effectively pledged to keep rates ultra low for
years to come by forecasting that core consumer inflation will
stay well below the 1 percent level deemed desirable until March
2014.	
    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 repeating a customary
warning that Tokyo might intervene in the currency market.	
    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.
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