The Bank of Japan eased monetary policy on Thursday by boosting purchases of government bonds and warned of risks posed by a strong yen and Europe's debt crisis in a sign it would act again if recovery in the world's third-largest economy falters.
Spurred by the yen's renewed climb to record highs and heightened overseas risks, the central bank delivered its second monetary stimulus in three months by topping up its asset buying scheme by 5 trillion yen to 20 trillion yen ($263 billion) while keeping interest rates on hold near zero.
The BOJ also cut its growth and price forecasts, while Governor Masaaki Shirakawa stressed various risks clouded the outlook.
Current yen rises are having a big negative impact on Japanese corporate sentiment and exports, Shirakawa told a news conference after the rate review.
Global economic uncertainty, including Europe's debt problem, remains very high, prompting global investors to seek safe haven assets.
Japan's economy has been recovering from the devastating March earthquake and until recently central bankers appeared reluctant to ease policy further, counting on fiscal spending on reconstruction and demand from emerging markets to sustain the upturn.
An agreement struck by European leaders on Thursday on a package of measures to tackle the euro zone's sovereign debt crisis, offered some relief to Japanese policymakers who fear the crisis may start to hurt their economy as well as emerging Asian nations that are key markets for Japanese goods.
But the yen's strength and lingering doubts whether Europe can produce a lasting solution to its debt crisis swayed the BOJ board in favor of more action.
Even if investors were not sure about the timing, the scale of the easing came as no surprise, and the yen -- buoyed by safe haven flows fueled by European debt jitters -- barely budged. It hovered around 75.88 to the dollar after the decision, just off its latest record high of 75.709 struck on Wednesday.
Few analysts expect the BOJ to hold off on easing for long.
The yen's uptrend won't change as it's driven by problems in Europe and the United States. Monetary easing needs to be coupled with currency intervention to be effective, said Mari Iwashita, chief market economist at SMBC Nikko Securities.
There's a chance the BOJ may (ease) again once or twice more, such as by buying more assets including corporate bonds by March next year, she said.
In a rare development at the consensus-minded BOJ, former academic Ryuzo Miyao -- regarded as one of the most pessimistic board members -- voted against the move, seeking a bigger 10 trillion yen increase to a broader 50-trillion-yen pool for asset buying and market operations.
Some analysts said the BOJ was not bold enough.
Bringing down long-term interest rates is effective in weakening the yen, said Hideo Kumano, chief economist at Dai-Ichi Life Research Institute. The BOJ decided to focus on increasing JGB purchases this time, but why didn't they decide to buy JGBs with maturities exceeding two years?
SLOWER, LESS CERTAIN RECOVERY
As expected, the central bank trimmed its growth forecasts for this fiscal year to March 2012 and next, while sticking with its view that Japan would continue a moderate recovery.
The BOJ cut next fiscal year's forecast to 2.2 percent growth from 2.9 percent and predicted 1.5 percent growth in the following year, which would still make Japan one of the best performing major advanced economies.
But it also highlighted that overcoming deflation would take time and said a multitude of risks to such a scenario warranted monetary easing now.
The entire increase in the asset buying scheme will take the form of more purchases of government bonds with no increase in private debt, given corporate financing has shown little sign of strain, the BOJ said.
But in contrast to past expansions, the central bank did not extend the deadline for the purchases, suggesting it will be buying government debt at a faster pace.
The BOJ also effectively pledged to keep rates ultra low for years to come by forecasting that core consumer inflation will stay well below the 1 percent level deemed desirable until March 2014.
Finance Minister Jun Azumi welcomed the BOJ's easing and described Europe's agreement on a 50 percent write-down of Greek debt as a big step forward, after repeating a customary warning that Tokyo might intervene in the currency market.
The BOJ previously eased policy by boosting its asset buying pool in August, acting in tandem with the Finance Ministry, which ordered Japan's biggest-ever single-day currency intervention, selling more than 4.5 trillion yen.
The impact proved short-lived, however, and the yen crawled back to trade close to its record highs.
This has been a source of deepening frustration for Japanese officials, who argue that a yen rally is one problem too many for a nation grappling with a nuclear crisis, a $250 billion post-quake rebuilding effort and ballooning debt.
($1 = 75.990 Japanese Yen)
(Additional reporting by Stanley White, Kaori Kaneko and Tetsushi Kajimoto; Writing by Leika Kihara and Tomasz Janowski; Editing by Edmund Klamann)