TOKYO The Bank of Japan eased monetary policy on Wednesday by boosting its asset-buying program, as prospects of a near-term recovery in the world's third largest economy faded due to weakening exports and a prolonged slowdown in Chinese growth.
The decision came hard on the heels of major quantitative easing announced by the U.S. Federal Reserve last week, and amid worries that a territorial dispute with China, Japan's biggest trading partner, will damage exports even more.
But, BOJ Governor Masaaki Shirakawa stressed that the move was prompted by recent disappointing data, not the Fed's action, while the anti-Japanese protests in China played no part in the decision to ease.
"Overseas economies are slowing more than we anticipated, which is why we downgraded Japan's economic view," Shirakawa told a news conference after the decision. "Japan's economic recovery could be delayed by about half a year."
The BOJ increased its asset buying and loan program, currently its key monetary easing tool, by 10 trillion yen ($127 billion) -- double the usual amount -- to 80 trillion yen, with the increase earmarked for purchases of government bonds and treasury discount bills.
Standing over $1 trillion, the total stimulus is now equivalent to nearly a fifth of Japan's economy.
The yen slipped to a one-month low, cash bonds rose and Tokyo's Nikkei stock average hit a four-month high on the decision to offer the bigger-than-expected stimulus, in a move that came a month earlier than many market players had expected.
In its statement announcing the decision, the BOJ cut its assessment of the economy to say its activity was pausing and projected growth to stay flat for the time being. It also took out a line forecasting a moderate economic recovery ahead.
"Japan's economic indicators have been looking weak, so the BOJ's move makes sense from that standpoint," said Hiroaki Muto, senior economist at Sumitomo Mitsui Asset Management in Tokyo.
"Shirakawa had been sending messages that the BOJ won't always do what the market expects, but I think the BOJ was a little surprised by the Fed's launch of QE3," he said.
A recent slew of weak data, including a slump in exports and factory output, has made Japanese central bankers less convinced that global demand will soon pick up to help a recovery in the export-reliant economy.
The Fed's pledge last week to buy assets open-endedly to boost job growth, dubbed QE3 by Wall Street, had also piled pressure on the Japanese central bank to follow suit with its own steps to support an economy feeling the pinch from a strong yen and the widening fallout from Europe's debt crisis.
Finance Minister Jun Azumi welcomed Wednesday's move, saying it was bolder than expected and will have a positive impact on Japan's economy by stabilizing currency moves.
While the yen has been well off its record high hit last year, the government has warned that economic growth has stalled and has been piling pressure on the BOJ for further stimulus.
The BOJ is due to release next month revised long-term growth forecasts that are expected to show that a sustained end to deflation remains distant.
The dollar jumped to a one-month high of 79.23 yen after the announcement, while the yield on the benchmark 10-year bond slipped 1.5 basis points to 0.795 percent.
The BOJ expanded its target for purchases of government bonds and treasury discount bills by 5 trillion yen each, and extended the deadline for meeting the new overall target by six months to December 2013.
It also scrapped a rule that limits purchases of government bonds to those yielding 0.1 percent or higher, a move aimed at smoothening fund supply as it faces growing problems force-feeding cash to markets already awash with excess liquidity.
The BOJ had to fine-tune its asset buying and loan program in July after repeatedly missing its target to buy bonds or offer funds in market operations, a sign that the huge amount of funds it is pumping into markets isn't filtering out to broader sectors of the economy.
Under the new target set on Wednesday, the BOJ would have to pump 20 trillion yen more into the banking system via asset purchases and market operations by the end of next year.
That would add to the BOJ's already increasing presence in the debt market. As of mid-2012, the central bank held about 11 percent of Japan's total outstanding debt, while government debt made up about 62.5 percent of assets held by the BOJ.
The BOJ set a 1 percent inflation target and loosened policy in February, and followed up with another easing in April. It has stood pat since then on hope that exports would have picked up.
($1 = 78.6100 Japanese yen)
(Additional reporting by Stanley White, Tetsushi Kajimoto and Kaori Kaneko; Editing by Simon Cameron-Moore)