BoJ to inject $130b in market to battle deflation

The central bank said it would increase its asset purchase programme by 10 trillion yen ($130 billion) to about 65 trillion yen, in a surprise move that softened the local currency and boosted the stock market.When central banks in Europe and the United States are taking more easing policies, the Bank of Japan appeared to be left behind, said Tsuyoshi Ueno, senior economist at NLI Research Institute.It was nonetheless a surprising move, which makes us wonder why now?, he said, suggesting the bank may have come under political pressure to fight deflation, which has stalked the Japanese economy for more than a decade.The (gross domestic product) figures were weaker than expected, and politicians are now discussing raising the sales tax, he said. Tackling deflation is a dire necessity. The BoJ move will see the bank buy financial assets such as government bonds and commercial paper from private financial institutions, effectively providing more money to banks who can then lend to cash-strapped firms.The central bank has been forced to resort to the unconventional measure as its ability to free up money has been limited since interest rates were cut to zero to 0.1 percent at the end of 2008 during the global financial crisis.The bank will pursue powerful monetary easing by conducting its virtually zero interest rate policy and by implementing the Asset Purchase Program mainly through the purchase of financial assets, the BoJ said in a statement. The easing, which follows a similar step in October, is intended to help nudge the year-on-year inflation rate to 1.0 percent, the bank said. The rate is currently zero percent.The outlook for Japans economy continues to entail high uncertainty regarding the prospects and outcomes of the European debt problem, the supply and demand balance of electricity and the effects of the yens appreciation, it said.The goal of overcoming deflation will be achieved through such efforts to strengthen growth potential and support from the financial side.Deflation continues to pose a threat to Japans economic recovery as a fall in general prices cuts into corporate profits, leading firms to slash jobs and put off capital investment that generates growth.It also hurts demand because it encourages consumers to put off purchases.The BoJ action strengthened the dollar against the Japanese unit, with the greenback buying 77.99 yen, up from 77.59 before the announcement, while the benchmark Nikkei index moved into positive territory in afternoon trade.The Nikkei closed up 52.89 points at 9,052.07, reversing losses in the morning. But Hideo Kumano, chief economist at Dai-Ichi Life Research Institute, warned that the central banks action would still not be enough to support the economy.On the face of it, you cannot say it is a dramatic change if it is only about expanding it by 10 trillion yen, Kumano said. It needs another something to become more effective.On Monday Japan said the economy shrank a worse-than-expected 2.3 percent on an annualised basis in the final three months of 2011, owing to the strong yen, falling overseas demand and record flooding in Thailand that hit production.The worlds number-three economy shrank 0.6 percent quarter-on-quarter, the Cabinet Office said, and 0.9 percent through 2011. It grew 4.4 percent in 2010.The contraction was more severe than the annualised 1.6 percent drop forecast by economists surveyed by Dow Jones Newswires. It also sharply contrasted with a revised 7.0 percent annualised growth for the July-September period, which was in part boosted by reconstruction after the March 11 earthquake and tsunami.