The Bank of Japan eased monetary policy by boosting asset purchases on Thursday at a rate review that was cut short by a day, signaling its determination to support Tokyo's solo currency intervention to weaken the yen.
The decision, by a unanimous vote, was widely expected as the central bank had signaled that any easing of credit would take the form of an increase in the 10 trillion yen ($130 billion) asset buying program.
Japan intervened in the currency market on Thursday to curb rises in the yen that officials fear threatened to derail the export-reliant economy's recovery from a slump triggered by a devastating earthquake in March.
Sources familiar with the central bank's thinking had told Reuters that the BOJ would ease policy if Tokyo stepped into the market, to maximize the effect of weakening the yen.
The decision to buy more assets, including exchange-traded funds (ETFs) and real-estate investment trusts (REITs), gave a modest boost to the Nikkei stock average. But the effect on the yen and bond yields was muted, casting doubt on how effectively it could help to keep yen rises in check.
The central bank seems to be working in sync with the MOF, and that is different from past times when they eased policy. It's a message that they are willing to act to stop the yen from appreciating further, said Koichi Ono, senior strategist at Daiwa Securities Capital Markets in Tokyo.
It still remains to be seen whether the easing will actually temper the yen's strength. The market focus has already shifted to what the BOJ may have to do if yen strength persists.
The BOJ added another 5 trillion yen to a 10 trillion yen pool of funds established last year, and doubled just days after the March quake, to buy assets ranging from government bonds to corporate debt.
It also topped up by the same amount a 30 trillion yen program offering funds via market operations at a fixed rate of 0.1 percent.
As a result, the size of its fund for asset buying and market operations backed by collateral was topped up by 10 trillion yen, to 50 trillion yen, which the BOJ hopes to have plowed into asset purchases by the end of next year.
As widely expected, the BOJ maintained its benchmark policy rate at a range of zero to 0.1 percent.
Japanese policymakers have repeatedly warned markets against pushing the yen too high, fearing that its surge of nearly 5 percent against the dollar over the past month might prevent the economy from pulling out of a brief post-quake recession in the autumn, when it shakes off quake-related supply constraints.
BOJ Governor Masaaki Shirakawa had signaled the central bank's readiness to ease policy this week, saying on Wednesday that the bank would take appropriate action while scrutinizing the negative impact that recent yen gains could have on the economy.
The comment likely reflected mounting concerns within the BOJ that a global slowdown and persistent yen rises were already hurting business sentiment and threatening its forecast that the economy would a resume a moderate recovery in the autumn.
The possibility of additional monetary stimulus heightened after Prime Minister Naoto Kan made a rare call on Wednesday for the central bank to support the economy, and a slump in Japan's stock prices raised concern that the pain from the yen rise was intensifying.
The BOJ's action follows a surprise interest rate cut by the Swiss central bank to ease buying pressure on its currency, which like the yen had been attracting funds switching out of the dollar because of fears of a U.S. credit downgrade and concerns about the health of the world's biggest economy.
The central bank's decision to ease, and to do so on the same day as currency intervention even if that meant cutting short its two-day rate review, indicated that it wanted to avoid a repeat of last summer when the yen spiked against the dollar on expectations of massive U.S. monetary easing and the BOJ was criticized for responding too slowly with its own easing steps.
It eased policy at an emergency meeting at the end of August only after explicit pressure from the government.
($1 = 76.890 Japanese Yen)
(Additional reporting by Rie Ishiguro; Editing by Edmund Klamann)