Tokyo: The Bank of Japan eased monetary policy on Wednesday by boosting its asset purchase programme, as prospects of a near-term recovery in the world’s third largest economy faded due to weakening exports and fall-out from a territorial dispute with China.

The decision came hard on the heels of major quantitative easing announced by the US Federal Reserve last week.

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.

The BOJ increased its asset buying and loan programme, currently its key monetary easing tool, by ¥10 trillion ($127 billion) to ¥80 trillion, with the increase earmarked for purchases of government bonds and treasury discount bills.

A recent slew of weak data, including a slump in exports and factory output, made central bankers less convinced that global demand will soon pick up to help a recovery in the export-reliant economy.

In its assessment of the economy, the central bank noted that a pick up in economic activity had paused and it removed a line from its post-decision statement forecasting a return to a moderate recovery.

“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.

“BOJ governor Masaaki 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.

The Fed’s pledge last week to buy assets open-endedly to boost job growth, dubbed QE3 by Wall Street, had 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.

The potential economic fallout from an escalating territorial dispute with China, Japan’s biggest trading partner, has added to headaches for policymakers fretting about the damage from a strong yen and weakening global demand on exports.

Force-Feeding Cash

Finance minister Jun Azumi welcomed the move, saying it was bolder than expected and will have a positive impact on Japan’s economy by stabilising 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 central bank for further stimulus.

Markets had been divided on whether the central bank would ease, or hold off on action to save its limited policy options for later.

The dollar jumped to a one-month high of ¥79.10 after the announcement, while the yield on the benchmark 10-year bond slipped 1.5 basis points to 0.795%.

The BOJ expanded its target for purchases of government bonds and treasury discount bills by ¥5 trillion 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% or higher, a move aimed at smoothening fund supply as it faces growing problems forcefeeding cash to markets already awash with excess liquidity.

The BOJ had to fine-tune its asset buying and loan programme 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.

The BOJ set a 1% 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 pick up.

But the economy expanded less than expected in the second quarter and analysts foresee growth stalling over the remainder of this year with the outlook clouded by Europe’s debt crisis, subdued Chinese growth, and the impact on trade from the row with Beijing. Reuters