The Bank of Japan unexpectedly expanded its asset-purchase fundby 10 trillion yen ($126 billion), seeking to counter an increasingdanger of contraction in the world's third-largest economy.

The BOJ's program, in which it buys mainly government debt, orJGBs, was enlarged to 55 trillion yen, the bank said in a statementin Tokyo. Governor Masaaki Shirakawa said the bank also willabandon minimum yields for 1.8 trillion yen in monthlygovernment-bond purchases conducted separately from the stimulusfund, opening the door to the potential for negative rates.

Japanese stocks jumped and the yen fell after the decision toease policy, which was forecast by only five of 21 analystssurveyed by Bloomberg News. With today's move, the BOJ joinscounterparts from the Federal Reserve to the European Central Bankin acting against persistent risks to growth, five years after theU.S. mortgage meltdown derailed the global economy.

“Whether central banks intend it or not, there is a competitionfor loosening monetary policy around the world,” said Izuru Kato,chief market economist in Tokyo at Totan Research Co. and one ofthe analysts who forecast easing. Shirakawa doesn't want to be seenas “reluctant to compete in the race” because of the risk of yengains that will hurt the economy, Kato said.

The Nikkei 225 Stock Average closed at its highest level sinceMay, and stocks in Europe halted a two-day decline after the BOJ'sannouncement. The yen lost 0.3 percent, trading at 79.02 as of 4:53p.m. in Tokyo, about 5 percent from the postwar high reached inOctober last year. Yields on benchmark 10-year government bondsfell 0.005 percentage point, to 0.810 percent.

The decision to purchase JGBs without regard to yield shouldhave an impact on financial markets, Shirakawa told reporterstoday. The so-called Rinban operations were maintained at 1.8trillion yen a month. Shirakawa said policy makers will closelymonitor the effect of yen strength.

In its unanimous policy decision, the BOJ kept the benchmarkinterest rate between zero and 0.1 percent and maintained aseparate fund that extends credit to banks at 25 trillion yen. Thebank downgraded its economic assessment, saying growth has “come toa pause” while overseas economies have moved “somewhat deeper intoa deceleration phase.”

Finance Minister Jun Azumi said today's easing was bolder thanexpected and “very much welcomed” by the government, after callsfrom some lawmakers for the BOJ to do more to spur growth andcounter entrenched deflation.

Extra Budget

Nuclear plant shutdowns, weakness in exports, tensions withChina and the risk the government will run out of money because ofa parliamentary deadlock over financing are challenges for aneconomy that contracted last year after an earthquake and tsunami.Prime Minister Yoshihiko Noda said last week that an extra budgetwill be needed.

JPMorgan Securities, Credit Suisse Group AG and BNP Paribasexpect Japan's economy to contract this quarter after growth slowedto a 0.7 percent annual pace in the previous three months. Theexpansion was 5.3 percent in the first quarter.

“Further easing is still possible this year because the BOJ isemphasizing uncertainties in its outlook,” said Masamichi Adachi, asenior economist at JPMorgan Securities in Tokyo.

Today's 10 trillion increase is made up of 5 trillion yen ofgovernment bonds and 5 trillion yen of treasury bills. The bankremoved minimum bidding yields for purchases of government andcorporate bonds after the BOJ failed to secure targeted amounts atsome of its buying operations. It pushed back the completion ofpurchases under the asset program to December 2013 from June2013.

Japan's weakening recovery faces an added threat from aterritorial dispute with China, Japan's biggest export market.Toyota Motor Corp., Honda Motor Co. and Nissan Motor Co., haltedproduction at some plants in China while Panasonic Corp. reporteddamage to a factory. Thousands have marched in anti-Japaneseprotests in dozens of cities.

The yen strengthened to a seven-month high of 77.13 per dollaron Sept. 13, after the Fed announced its plan to buy $40 billion amonth of mortgage debt in a third round of so-called quantitativeeasing. The yen has gained about 47 percent in the past five years,eroding exporters' profits.

“We are concerned about an increase in the speed of yenappreciation, and our sense of crisis is intensifying,” AkioToyoda, chairman of the Automobile Manufacturers Association andchief executive officer of Toyota, said Sept. 14. “We strongly hopethe government and the BOJ can cooperate closely and act swiftly tocorrect a historically strong yen level.”

In other economic news in Asia today, China said that foreigndirect investment fell in August and that the spat with Japan willhurt trade relations between the two nations. In the U.K., the Bankof England will release minutes of its Sept. 5-6 meeting, whenpolicy makers left their benchmark interest rate at 0.5 percent andkept an asset-purchase target unchanged.

The U.S. will release data on housing starts and home sales.

Bloomberg News

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