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BOJ holds fire after Fed and gets asset buying plan going


A man walks past the Bank of Japan headquarters in Tokyo November 4, 2010. REUTERS/Yuriko Nakao
A man walks past the Bank of Japan headquarters in Tokyo November 4, 2010. REUTERS/Yuriko Nakao

By Leika Kihara

TOKYO (Reuters) - The Bank of Japan refrained from further monetary easing on Friday, resisting for now any temptation to boost its asset buying scheme to keep pace with the Federal Reserve's new economic stimulus.

The BOJ is the third major central bank to hold fire after the Fed's November 3 move to pump $600 billion more into the struggling U.S. economy by buying government bonds.

The scope of the plan broadly matched market expectations, which means Japan was spared a dollar sell-off and a sharp yen spike that could have forced the BOJ's hand.

That allowed the BOJ to focus on rolling out its own 5 trillion yen ($62 billion) asset buying plan unveiled last month. The scheme will kick off early next week with government bond purchases and will also buy real estate investment trusts (REITs) and exchange-traded funds (ETFs) linked to Tokyo stock indexes.

Both the European Central Bank and the Bank of England kept their policies unchanged on Thursday, seemingly satisfied that the euro zone and Britain did not need as potent medicine as prescribed by the Fed for the U.S. economy.

As expected, the BOJ also unanimously voted to keep its rates effectively at zero and maintained the size of the asset buying plan.

However, expectations that the dollar will stay weak because of the Fed's easing are set to keep Japanese policymakers primed for more action to prevent yen strength from further damaging the export-reliant economy.

"What has been announced is not enough compared to the U.S. central bank's expansion of easing steps," said Susumu Kato, chief economist at Credit Agricole in Tokyo.

"The BOJ needs to further expand its easing measures to beat deflation and prevent the yen from appreciating further. It is expected to do so in the next few months."

UNCONVENTIONAL BUYS

In fact, by pointing out the contrast in the size of the Fed and BOJ schemes, Economics Minister Banri Kaieda suggested that Japan's central bank might face calls in the future for an expanded scheme.

BOJ Governor Masaaki Shirakawa has also signaled the central bank's readiness to top up the 5 trillion yen asset buying fund if economic conditions worsen further.

The yen edged 0.1 percent higher after the BOJ decision, trading at 80.70 to the dollar, indicating that some players had not ruled out the possibility of BOJ action on Friday.

The bank's statement echoed Shirakawa's recent comments that Japan's moderate economic recovery was stalling because growth in exports and output was tapering off but it should eventually resume.

The BOJ last eased its policy early in October by setting a new interest rate target in a 0-0.1 percent range, pledging to keep rates effectively pegged at zero until the end of deflation was in sight, and by announcing the asset buying plan.

Detailing the scheme on Friday, the BOJ said it would buy Japan REITs rated AA or above and ETFs linked to the benchmark Topix <.TOPX> and Nikkei 225 <.N225> stock indexes under the plan, which also covers BBB-rated corporate bonds and commercial paper.

The plan was greeted with questions on whether an injection of $60 billion could do much good for a $5 trillion economy and suggestions that a Fed-style bond buying spree aimed at weakening the yen might be the only real weapon left in the BOJ's arsenal.

The central bank, however, says its 2001-2006 campaign of flooding banks with cash failed to break the vicious cycle of falling prices, weak demand, and stagnant output and investment, and that its new, more focused approach is more promising.

The BOJ says its current scheme aims to reduce risk premiums and encourage private investment by targeting a broader range of assets than the Fed buys, including less conventional, riskier instruments.

(Additional reporting by Rie Ishiguro; Writing by Tomasz Janowski; Editing by Edmund Klamann)

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