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BOJ Pledges to Buy Assets; 'Yes' to 2% Inflation Target

Masaaki Shirakawa, governor of the Bank of Japan
Haruyoshi Yamaguchi | Bloomberg | Getty Images
Masaaki Shirakawa, governor of the Bank of Japan

The Bank of Japan doubled its inflation target to 2 percent and made an open-ended commitment to buy assets from next year, surprising markets that had expected another incremental increase in its $1.1 trillion asset-buying and lending programme.

But central bankers were divided on the new price target with two in the nine-member board voting against setting it at 2 percent, underscoring the dilemma the BOJ faces as it struggles to beat deflation with its depleted policy arsenal.

The BOJ has been under relentless pressure from new Prime Minister Shinzo Abe for bolder action to overcome deflation and lift the economy out of recession.

Until Tuesday, the central bank had pledged to pump 101 trillion yen ($1.1 trillion) into markets with its asset-buying and lending programme by the end of this year, but had made no commitment on whether to maintain the balance beyond 2014.

At the two-day meeting that ended on Tuesday, it decided that from 2014 it would switch to an open-ended approach of buying a certain amount of assets each month without setting a deadline for completing the purchases.

From 2014, the BOJ will buy 13 trillion yen in assets each month, including 2 trillion yen in long-term government bonds and 10 trillion yen in treasury discount bills, the central bank said in a statement.

The remaining one trillion yen would be to make purchases to maintain the balance of the BOJ's holdings of private debt targeted under the existing asset-buying programme.

"The BOJ will pursue powerful monetary easing by maintaining virtually zero interest rates and purchases of financial assets as long as it deems appropriate," the statement said.

The BOJ issued a joint statement with the government in which it set 2 percent inflation as its new target.

As widely expected, the BOJ maintained its overnight call rate target in a range of zero to 0.1 percent by a unanimous vote. The decision to adopt an open-ended asset buying program was also made by a unanimous vote.

(Read More: Further Yen Weakness Unlikely: Japan's 'Mr Yen')

The yen has dropped 13 percent against the dollar in the past two months to hit a two-and-a-half-year low on expectations Abe will force the BOJ into bolder action. Tokyo stocks have jumped by a fifth on the view the weaker yen will boost the export earnings of the likes of Nissan Motor and Canon.

The dollar fell more than one yen from its session high on Tuesday after initial excitement about the Bank of Japan's adoption of a 2 percent inflation target and its open-ended commitment to asset purchases petered out.

The Nikkei share average dropped 0.8 percent, erasing gains made immediately after the Bank of Japan announcement.

For the government's part, Abe has promised a boost to spending to help get the economy back on its feet. Abe's stimulus may give the economy only a temporary boost at best unless he follows through with politically more difficult economic reforms, such as deregulating protected sectors such as agriculture, analysts say.

Still, Abe is likely to keep pressure on the BOJ for more stimulus even after Tuesday's meeting at least until an upper house election expected in July.

Abe is also expected to try to install a central bank governor more sympathetic to aggressive monetary policy easing when incumbent Shirakawa's term ends in April. Shirakawa has maintained that monetary policy alone can not pull the economy out of deflation.

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