The Bank of Japan eased its policy on Tuesday by boosting asset purchases and defined 1 percent inflation as a near-term goal, signalling its resolve to take further action to beat deflation in the face of growing political pressure to support a fragile economic recovery.

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 for asset purchases, with the increase earmarked entirely for long-term government bonds.

That boosted its asset-buying and lending scheme, under which it buys government and private debt and lends funds against collateral, to 65 trillion yen.

The BOJ also said it will set consumer inflation of 1 percent as its price goal for the time being, making a clearer commitment to end deflation than before when it defined the level as its understanding on long-term price stability.

The steps follow weeks of growing calls from politicians to follow the example of the U.S. Federal Reserve and set an explicit inflation target to show greater commitment to reinflating the economy, which is mired in deflation and hampered by a strong yen.

Most central banks set inflation targets to anchor expectations and prevent prices from rising too quickly, but in Japan's case an inflation goal acts as an incentive to pursue more aggressive easing to stop prices from declining.

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.

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.

The U.S. central bank 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 monetary easing that could further weaken the dollar and thus put the yen under renewed upward pressure.

Ten-year government bond futures jumped and the yen dipped as much as 0.4 percent in response to the BOJ's decisions.

As widely expected, the BOJ also left its key interest rate unchanged at a range of zero to 0.1 percent by a unanimous vote.


The government, worried the economy may not be robust enough to stomach tax increases proposed to fix stretched public finances, has been leaning on the central bank to help keep the yen in check and support Japan's fragile recovery from last year's earthquake, tsunami and nuclear crisis.

Tuesday's steps got mixed reviews with some analysts, praising the central bank for taking more forceful action and pre-empting risks that may lie ahead, while others worried that it was caving into political pressure.

The timing came as a surprise to markets given many central bankers, including Deputy Governor Hirohide Yamaguchi, signalled there was little reason to act immediately with the yen off its record highs and the economy on course for a moderate recovery.

The BOJ eased without changing that forecast and said its latest move was aimed at giving the recovery additional support.

The central bank pledges to keep ultra-low interest rates until an end to deflation is in sight, but prior to this week's meeting had defined 1 percent consumer inflation as the board's understanding of desirable price growth.

While it changed that language to say 1 percent consumer inflation was a near-term price goal, it avoided describing it as an explicit target.

Finance Minister Jun Azumi, however, told reporters after the announcement that he saw 1 percent price growth as an effective inflation target, a sign its new commitment -- whatever the name -- will keep the central bank vulnerable to pressure for further action.

The BOJ may respond again in coming months and is quietly reviewing an alternative to its asset buying programme, which can probably only be topped up once or twice more given it is already struggling to feed cash to markets awash with extra liquidity.

The central bank has decided to buy quite a large amount of JGBs and its mention of a stability goal with a specific target was not expected until the spring. It has acted more strongly than expected, said Katsutoshi Inadome, fixed income strategist at Mitsubishi UFJ Morgan Stanley Securities.

The bank still has further easing options left, like increasing the amount of assets it buys and buying JGBs with longer maturities.

(Additional reporting by Rie Ishiguro, Kaori Kaneko and Tetsushi Kajimoto; Editing by Tomasz Janowski)