BOJ Signals More Aggressive Policy, Sets Inflation Goal

"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.

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"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 one percent as its price goal for the time being, a clearer commitment to end deflation. It had previously defined one 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.