The Bank of Japan kept monetary policy on hold on Tuesday, overruling a lone proposal for more stimulus and disappointing some in markets who thought the central bank could follow up last month's easing with another move to amplify its impact.
The central bank instead expanded a loan scheme targeting growth industries by 2 trillion yen ($24 billion) to 5.5 trillion yen.
Under the plan, it created several new loan arrangements including one that will tap its dollar reserves for investments and loans denominated in foreign currencies.
As expected, the BOJ kept its policy rate unchanged at a range of zero to 0.1 percent and refrained from increasing its asset purchasing scheme after boosting it by 10 trillion yen last month.
But the yen ticked up after the decision, while government bond futures and Tokyo share prices trimmed gains in a sign that some market players had counted on another surprise.
Even though some overseas market players seem to have expected further easing, the central bank held its fire because of the rather favorable economic outlook, said Junko Nishioka, chief Japan economist at RBS.
That said, the BOJ is basically maintaining its stance of monetary easing after setting an inflation goal of 1 percent. To clarify its determination to beat deflation, the BOJ could ease policy further as early as late April, she said.
Ryuzo Miyao, regarded as one of pessimists on the bank's board, proposed to increase the asset buying and loan scheme again by 5 trillion yen to 70 trillion yen, but was outvoted 8 to 1.
Some lawmakers have called for another big bang after last month's surprise easing helped drive the yen away from its recent highs, giving Japanese exporters some breathing room.
The central bank, however, likely felt it has done enough for now, with the yen well off record highs, stocks up and euro zone debt jitters receding.
FED MOVE KEY
BOJ Governor Masaaki Shirakawa stressed the central bank's resolve to do its utmost to beat deflation and warned of lingering risks to the outlook such as rising crude oil prices, but offered few clues on when the bank may move next.
What's important in our policy decisions is whether the economy is heading towards (desirable price growth), he told a news conference, when asked whether the BOJ will continue boosting monetary stimulus even when the economy is recovering.
Last month, in addition to expanding its asset buying scheme by double the usual amount, the central bank responded to politicians' calls for greater efforts to pull Japan out of deflation by setting a 1 percent inflation goal.
Even without politicians' nudging, the BOJ now seems more willing to act more frequently to support a budding recovery and achieve the price goal, making its actions less predictable.
But with output rising, exports seen improving and Greece having averted a disorderly debt default for now, the BOJ likely decided to save its scant remaining ammunition.
The BOJ expanded a separate 3.5-trillion-yen loan scheme to encourage banks to fund prospective growth industries, created in June 2010 as a long-term effort to boost the economy's growth potential, and extended its deadline by two years to March 2014.
Of the increase, one trillion yen will be set aside for a new credit line using the BOJ's dollar reserves to encourage investment and loans denominated in foreign currencies.
Analysts say the plan has limited policy significance given its scope, but is another way for the BOJ to demonstrate that it is doing all it can to invigorate the sluggish economy.
The BOJ is expected to stick to boosting the asset buying and lending programme when it next eases policy. But achieving the current target is already becoming difficult.
The BOJ needs to buy 20 trillion yen in assets by the end of this year to meet the new 30 trillion-yen target, but that is no easy task as some of its auctions already fail to draw enough bids in a sign it is force-feeding more cash than markets can swallow.
That means it may need to extend the maturity of bonds it buys under the programme to three-year and five-year bonds if it were to expand the scheme again.
Federal Reserve policy remains key to when and how much the BOJ will ease next. Recent signs of improvement in U.S. job markets have led economists to scale back expectations of more stimulus from the U.S. central bank, which also holds a policy meeting on Tuesday. ($1 = 82.2200 Japanese yen)
(Additional reporting by Rie Ishiguro, Tetsushi Kajimoto and Kaori Kaneko; Editing by Tomasz Janowski and Kim Coghill)