UPDATE 3-BOJ signals more aggressive policy, sets inflation goal

Tue Feb 14, 2012 5:42am EST

* BOJ adds 10 trillion yen to asset-buying scheme
    * BOJ defines 1 pct consumer inflation as price goal
    * Says to keep zero rates, buy assets until goal foreseen
    * Comes after Fed sets inflation target
    * Bond futures jump, yen dips on surprise move
    * BOJ Gov promises "massive" bond buying


    By Leika Kihara	
    TOKYO, Feb 14 (Reuters) - The Bank of Japan boosted
its asset buying programme by $130 billion on Tuesday and in the
face of political pressure set an inflation goal of 1 percent,
signalling 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.	
    "We will be buying massive amounts of government bonds,"
Governor Masaaki Shirakawa told reporters. "This is designed to
achieve sustained economic growth under stable prices."	
    Ten-year government bond futures jumped and the yen
 dipped as much as 0.4 percent on the BOJ news.	
    	
    	
    TIMING PUZZLES MARKETS	
    Most central banks set inflation targets to anchor
expectations and prevent prices from rising too quickly. In
Japan's case, an inflation goal will act as an incentive to
pursue more aggressive easing to stop prices from declining.	
    Core inflation fell in 2011 for the third straight year.	
    The Fed last month took a historic step of setting an 
inflation target and extended its commitment to near zero rates,
leaving the door open to more easing that could further weaken
the dollar and put the yen under renewed upward pressure.	
    The yen rose to record highs against the dollar last year,
sparking a wave of corporate calls for official action and
prompting unilateral currency intervention by Japan on Oct 31.	
    The BOJ's steps follow weeks of growing calls from
politicians to follow the Fed's example and set an explicit
inflation target to show a greater commitment to boosting the
economy, which shrank 0.9 percent last year largely as yen
strength hurt export earnings.	
    The timing came as a surprise as many central bankers had
suggested there was little reason to act now because the yen had
backed off its record highs and the economy was on course for a
moderate recovery.	
    The BOJ eased policy while maintaining expectations for a
moderate recovery, unlike in the past when it responded to a
worsening economic outlook. Shirakawa said Tuesday's decision
was aimed at giving the recovery additional support, shrugging
off suggestions the BOJ had yielded to government pressure or
was monetising debt.	
    "There are some bright economic signs at home and abroad.
We'd like to ensure they are sustained," he said.	
    	
    MORE TO COME	
    While the BOJ changed its language in describing 1 percent
consumer inflation as a near-term price "goal," it avoided
describing it as an explicit target.	
    Finance Minister Jun Azumi, however, told reporters he
considered 1 percent as an effective inflation target, a sign
the government will keep up pressure on the central bank to take
further action.	
    Even under the new 30-trillion-yen target, the BOJ needs to
buy 20 trillion yen more assets by year-end under time limits
set in the scheme. It would mean buying government bonds at
triple the pace from now.	
    In addition to the asset buying scheme, the BOJ has an
existing 35 trillion yen pool of funds for lending to banks
against collateral at the policy rate.	
    The BOJ may act again in coming months and is quietly
reviewing an alternative to its asset buying scheme, which can
probably only be topped up once or twice given it is already
struggling to feed cash to markets awash with extra liquidity.	
    "The central bank has decided to buy quite a large amount of
JGBs and its mention of a stability goal with a specific target
was not expected until the spring. It has acted more strongly
than expected," said Katsutoshi Inadome, fixed income strategist
at Mitsubishi UFJ Morgan Stanley Securities.	
    "The bank still has further easing options left, like
increasing the amount of assets it buys and buying JGBs with
longer maturities."
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