Bank of Japan boosts stimulus again, but fails to impress markets

TOKYO (Reuters) - The Bank of Japan boosted its bond-buying scheme by a further 10 trillion yen ($124 billion) on Friday and pledged to buy longer-term government debt in a move seen aimed at convincing both impatient politicians and investors of its resolve to pull the economy out of deflation.

The central bank also kept expectations of more stimulus alive as it pledged to "pursue powerful monetary easing" to reach its 1 percent inflation target, even as it nudged up its growth and price forecasts for the coming years.

The policy easing came at the top of an expected 5-10 trillon yen range and initially impressed markets, pushing the yen lower. The central bank's decision to buy more exchange-trade funds and real-estate linked funds also helped lift Tokyo shares <.N225>.

But the yen later crept back up and stocks slipped as several market players saw the BOJ's decision to give itself more time to hit the bond-buying goal as a sign that central bankers themselves had doubts about how much good their action would do for the struggling economy.

"The leopard doesn't change its spots. It (the BOJ) doesn't view monetary accommodation as a cure capable of reversing Japan's deflation," said Tim Condon, chief Asia economist at ING in Singapore.

"They seem motivated by politics and political pressure in these last couple of moves ... so I think they will do the minimum that they feel they are forced to do."

The BOJ's second easing in just over two months comes at a time when the economy is picking up and was seen mainly as symbolic response to politicians' calls for more efforts in battling deflation that has dogged Japan for over a decade, depressing consumption and business investment.

BUYING BONDS, BUYING TIME

The first political reactions to Friday's decision suggested the central bank may have only bought itself a little bit of time.

Finance Minister Jun Azumi described the move as "another bold easing step", but also said he hoped the central bank would continue to take such steps.

The main opposition party's shadow finance minister Yasutoshi Nishimura was more blunt, saying the BOJ had only done the minimum. "It should have been more daring."

In its semi-annual economic report released later in the day, the central bank raised its growth forecast for the current fiscal year to March 2013 to 2.3 percent from 2.0 percent seen in January.

Data earlier on Friday also confirmed the world's third-largest economy was picking up, with March factory output rising at the fastest pace in three months, even though it undershot expectations.

But 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.

The bank forecasts consumer prices to rise 0.7 percent in the fiscal year 2013/14 and reach 1 percent some time thereafter.

While boosting the pool for asset purchases, the central bank cut by 5 trillion yen the scope of its fixed-rate market lending operations, citing faltering demand.

As a result, it increased the combined asset-buying and loan program by 5 trillion yen to 70 trillion yen.

It also extended the duration of the purchasing program by six months to June 2013, a sign that the pace of government bond purchases will not change that much.

"I find these moves disappointing. Yes, the BOJ will own more JGBs by mid 2013. Indeed they will own more JGBs by end of 2012. However, the total size of the asset purchase program has not increased by the end of this year ... This is the disappointing part for me," said Westpac chief currency strategist Robert Rennie in Sydney.

As expected, the BOJ also said it would extend the duration of government bonds targeted under its asset-buying scheme to three years from the current two years.

With interest rates virtually at zero, the BOJ has created as its main policy tool a pool of funds to buy government bonds as well as corporate debt, ETFs and REITs.

With its limited ability to influence credit, the key gauge of the effectiveness of the policy has become its impact on the yen currency and the bond and stock markets.

Because of that, analysts say that the BOJ has 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 government 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.

($1 = 80.7900 Japanese yen)

(Writing by Leika Kihara and Tomasz Janowski; Editing by Kim Coghill)

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