The Bank of Japan delivered its third dose of monetary stimulus in four months on Thursday in a prelude to more aggressive action next year, as it faces intensifying pressure from the country's next leader for stronger efforts to beat deflation.
Shinzo Abe, whose opposition Liberal Democratic Party (LDP) won Sunday's election by a landslide, has put the central bank's independence on the line by repeatedly calling for a binding 2 percent inflation target, double its current price goal.
Continue Reading Below
The BOJ expanded its asset-buying and lending program by 10 trillion yen ($119 billion) to 101 trillion yen, a widely expected move to ease monetary policy in response to the intense political pressure.
It also signaled a review of its current 1 percent inflation target at its next policy-setting meeting in January, when Abe will have a new cabinet in place ready to negotiate with the central bank.
"The Bank will discuss at the next meeting the medium- to long-term price stability it aims to achieve in the conduct of monetary policy," the central bank said in a statement after Thursday's meeting.
With the latest action, the BOJ has expanded asset purchases five times this year, the most frequent activity during single year in a decade. The last time it eased so many times was in 2001, when then Governor Masaru Hayami was battling a domestic banking crisis.
Markets had priced in BOJ action on Thursday, with 14 out of 19 economists polled by Reuters last week expecting further easing via an increase in asset purchases.
The yen has fallen almost 9 percent against the dollar since September, as Abe's emergence as the likely next prime minister raised market expectations of more expansionary policy and spending.
The dollar rose from about 84.23 yen to an intraday high of about 84.39 yen right after the BOJ's decision, but later sagged back down. It last stood at 84.21 yen, down 0.2 percent on the day.
Abe has said once he forms a cabinet on December 26 he will instruct his ministers to begin working with the BOJ on setting a shared inflation target.
Some in the BOJ, particularly officials close to the conservative Governor Masaaki Shirakawa, had wanted to delay any action until January, when there is more clarity on the new government's policies and when the central bank conducts a quarterly review of its long-term growth projections.
But that was too costly with business sentiment already slumping and companies delaying capital spending plans on weak global demand, adding to evidence that any rebound from recession early next year will be minor, analysts say.
Abe made a rare, direct push for a higher inflation target when Shirakawa visited the LDP's headquarters on Tuesday, saying that the central bank must pay heed to the fact that he won an election campaigning for bolder monetary stimulus.
The LDP and its coalition partner, the New Komeito, together won a two-thirds majority in the powerful lower house that would allow them to overrule parliament's upper house in most matters, including on any bill to revise the law guaranteeing the central bank's independence from government interference.
Abe, who plans to compile a big stimulus package to revive the economy, may use that threat to nudge the central bank into buying bonds more aggressively to finance the costs.
Politicians kept up the heat with a senior LDP official telling Reuters hours before the policy decision that it would make a difference if the BOJ showed its willingness to ease policy aggressively.
Shirakawa has consistently argued that setting a 2 percent inflation target would be counter-productive in a country that has not seen consumer inflation exceed 1 percent for most of the past two decades.
The central bank governor was due to hold an embargoed news conference later, with his comments expected some time after 0715 GMT.
($1 = 84.2600 Japanese yen)
(Additional reporting by Tetsushi Kajimoto; Editing by Alex Richardson and John Mair)