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

The BOJ's program, in which it buys mainly government debt, or JGBs, was enlarged to 55 trillion yen, the bank said in a statement in Tokyo. Governor Masaaki Shirakawa said the bank also will abandon minimum yields for 1.8 trillion yen in monthly government-bond purchases conducted separately from the stimulus fund, opening the door to the potential for negative rates.

Japanese stocks jumped and the yen fell after the decision to ease policy, which was forecast by only five of 21 analysts surveyed by Bloomberg News. With today's move, the BOJ joins counterparts from the Federal Reserve to the European Central Bank in acting against persistent risks to growth, five years after the U.S. mortgage meltdown derailed the global economy.

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

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

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

In its unanimous policy decision, the BOJ kept the benchmark interest rate between zero and 0.1 percent and maintained a separate fund that extends credit to banks at 25 trillion yen. The bank downgraded its economic assessment, saying growth has “come to a pause” while overseas economies have moved “somewhat deeper into a deceleration phase.”

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

Extra Budget

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

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

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

Today's 10 trillion increase is made up of 5 trillion yen of government bonds and 5 trillion yen of treasury bills. The bank removed minimum bidding yields for purchases of government and corporate bonds after the BOJ failed to secure targeted amounts at some of its buying operations. It pushed back the completion of purchases under the asset program to December 2013 from June 2013.

Japan's weakening recovery faces an added threat from a territorial dispute with China, Japan's biggest export market. Toyota Motor Corp., Honda Motor Co. and Nissan Motor Co., halted production at some plants in China while Panasonic Corp. reported damage to a factory. Thousands have marched in anti-Japanese protests in dozens of cities.

The yen strengthened to a seven-month high of 77.13 per dollar on Sept. 13, after the Fed announced its plan to buy $40 billion a month of mortgage debt in a third round of so-called quantitative easing. 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 yen appreciation, and our sense of crisis is intensifying,” Akio Toyoda, chairman of the Automobile Manufacturers Association and chief executive officer of Toyota, said Sept. 14. “We strongly hope the government and the BOJ can cooperate closely and act swiftly to correct a historically strong yen level.”

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

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

Bloomberg News

Instant Insights /

Bank of Japan Unexpectedly Eases

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