The Bank of Japan bowed to government pressure and eased monetary policy after an emergency meeting on Monday to try to curb a rise in the yen that is threatening a fragile economic recovery.
But analysts questioned whether the central bank's action would do much to help to stem a rise in the Japanese currency that hurts exports and may delay Japan's exit from deflation.
The BOJ expanded a special funding operation supplying cheap fixed-rate loans to banks, saving more aggressive steps for when there is clearer evidence of an economic slowdown.
The BOJ decision is out with tweaks as expected on the liquidity operation but no increase in bond purchases. So it's rather half-hearted and still resisting government pressure, said Andy Ji, currency strategist at the Royal Bank of Scotland in Singapore.
The intervention ball is back to the government and MOF (Ministry of Finance) has to make a call on that.
Although Japanese nominal interest rates are at rock bottom, deflation has boosted real rates, deterring investment and driving up the yen as overseas investors seek real yields that are higher than those in other major economies.
Prime Minister Naoto Kan was to meet BOJ Governor Masaaki Shirakawa after the policy board meeting, Chief Cabinet Secretary Yoshito Sengoku told a news conference.
The yen climbed back to its highs of the day on the BOJ's announcement, pulling the Nikkei share average <.N225> off its peaks and helping JGB futures bounce back from an early plunge.
KAN KEEN TO LOOK PROACTIVE
Kan, whose Democratic Party swept to power for the first time exactly one year ago but was thrashed in a July upper house poll, is keen to look proactive on the economy as he faces a challenge from powerbroker Ichiro Ozawa in a September 14 party leadership vote that could split the party.
Cabinet ministers are due to decide the basic thrust of additional measures to help the slowing economy at a meeting later on Monday, Sengoku said, but Japan's huge public debt, now twice the size of the economy, constrains their options.
The government's fiscal policy and the BOJ's monetary policy should be in sync to send a strong message, Trade Minister Masayuki Naoshima told reporters.
Japanese policymakers have tried to talk down the yen, signalling the possibility of intervening in the market after the Japanese currency hit a 15-year high of 83.58 yen against the dollar last week. The government has also heightened pressure on the BOJ to do its part.
Governor Shirakawa will hold a news conference at 2:30 p.m. (0530 GMT), the BOJ said.
Japan will likely need to intervene alone if it were to step in to curb yen gains, as its Group of Seven counterparts, happy with the benefits to exports from their weak currencies, are in no mood for coordinated intervention.
Solo currency intervention, however, will not have much effect in weakening the yen unless joined by aggressive monetary easing by the BOJ, traders say.
The BOJ had been considering easing policy and lining up its options, but wanted to wait until its next regular rate review on September 6-7 for clearer evidence of the harm the yen's rise was inflicting on business sentiment.
In Monday's move, the central bank increased the volume of money available to banks under its fixed-rate fund supply operation to 30 trillion yen ($351 billion) from 20 trillion yen.
It also put in place a six-month fund operation in addition to the three-month loan programme already in place.
Of the 30 trillion yen, 10 trillion yen will be the six-month fund operation, BOJ said. The decision was by an 8-1 vote, with board member Miyako Suda dissenting.
The central bank, as widely expected, maintained its overnight core rate target at 0.1 percent by a unanimous vote.
The BOJ set up the cheap funding scheme, which offers up to 20 trillion yen ($234.3 billion) in three-month loans at 0.1 percent, in December, at an emergency meeting held a day before Shirakawa met with then Prime Minister Yukio Hatoyama.
That failed to boost bank lending but helped to push the yen further away from a November high.
In a sign markets are awash with more funds than banks can swallow, the fund supply operation now draws bids nearly five times the amount offered at each operation, down from about seven times in the previous month.
Expanding the fund supply tool is therefore more of a token gesture to show that the central bank was doing what it could to support the economy.
The BOJ last eased monetary policy in March, when it doubled the size of the fixed-rate fund supply tool to 20 trillion yen.
(Writing by Leika Kihara and Linda Sieg; additional reporting by Tetsushi Kajimoto; Editing by Edmund Klamann & Kazunori Takada)