The Bank of Japan expanded its asset-purchase program for the second time in two months, a move that failed to cheer investors as stocks slumped amid mounting evidence that the economy contracted last quarter.

The fund will increase by 11 trillion yen ($138 billion) to 66 trillion yen while a separate credit loan program will stay at 25 trillion yen, the bank said in Tokyo, acting hours after data showed the biggest decline in industrial output since last year's earthquake. The BOJ will also offer unlimited loans to banks to boost credit demand.

The Nikkei 225 Stock Average closed 1 percent lower and the yen strengthened as faltering exports and waning domestic demand bolster the case for more easing in coming months after the bank forecast it will miss its inflation target in the next two fiscal years. Economy Minister Seiji Maehara attended his second BOJ meeting today and, in a joint statement with Governor Masaaki Shirakawa, said that the government “strongly expects” powerful easing until deflation is overcome.

“The easing hasn't ended,” said Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management. “It's possible that the BOJ will next ease around January,” when it reviews its price and growth forecasts released today, he said.

All but one of 27 economists surveyed by Bloomberg News had predicted easing today, with the majority expecting a 10 trillion yen expansion. The bank expanded its asset-purchase fund by 10 trillion yen on Sept. 19, making today the first time since May 2003 that it has loosened twice in two months.

The yen gained 0.4 percent to 79.50 per dollar at 4:52 p.m. in Tokyo after declining more than 2 percent this month. Strength in the currency has eroded the sales and profits of the nation's exporters, with the yen reaching a postwar high of 75.35 per dollar in October last year.

Price falls have continued since May, highlighting the bank's struggle to attain its 1 percent inflation target announced in February.

The bank said today that it expects prices excluding fresh food to rise by 0.8 percent in the fiscal year that begins in April 2014, its first projection for that year, confirming that it expects to miss its target in the next two fiscal years.

The central bank also said today it will offer unlimited loans at low interest rates to lenders to try to boost credit demand among companies and households. The loans will be based on the overnight call rate, currently 0.1 percent, it said.

“The BOJ has unveiled similar lending facilities in the past, but they have never been effective in stimulating borrowing demand,” said Hideo Kumano, chief economist at Dai- ichi Life Research Institute and a former BOJ official. “The new loan program will probably have little impact.”

Rate Held

The BOJ maintained its benchmark interest rate between zero and 0.1 percent and the amount of monthly bond purchases at 1.8 trillion yen. The asset purchase fund has been its main policy tool since its introduction in October 2010.

Japan's industrial production fell a more-than-expected 4.1 percent in September from the previous month, the steepest since last year's earthquake and tsunami, data showed today before the bank's meeting. Exports dropped 10.3 percent from a year earlier and retail sales rose less than forecast in September, data showed this month.

Honda Motor Co., Japan's third-largest carmaker, yesterday cut its full-year profit forecast after Chinese consumers shunned Japanese brands amid a territorial dispute between Asia's two-biggest economies. Canon Inc., Nintendo Co. and Kawasaki Heavy Industries Ltd. revised down their forecasts last week.

Japan announced 750 billion yen of fiscal stimulus on Oct. 26 amid concerns over financing more spending, as opposition lawmakers block a bill allowing the government to borrow 38.3 trillion yen for this year's deficit amid a dispute over the timing of an election.

Central banks from Australia to South Korea have reduced their key rates this month. Earlier today, India's central bank cut lenders' reserve requirements while leaving interest rates unchanged. The International Monetary Fund trimmed its global growth forecast to 3.3 percent this year as the euro area's debt crisis threatens the world economy.

In the U.S., stock markets were prevented from opening by Sandy, the Atlantic Ocean's biggest-ever tropical storm. Strong winds and rain roared ashore late yesterday and disrupted commerce, transportation, utilities and government services from Boston to Washington.

In Europe, Spain's gross domestic product contracted 1.6 percent in the third quarter from a year earlier, Germany's unemployment rate probably rose to an 11-month high of 6.9 percent in October and euro-area consumer confidence hovered near the lowest level since 2009.

Bloomberg News

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Bank of Japan Expands Stimulus

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