By Leika Kihara
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The central bank kept its policy rate unchanged at a range of zero to 0.1 percent but topped up its asset buying program by 5 trillion yen to 20 trillion yen ($263 billion), offering its second monetary stimulus in three months.
Japan's economy is recovering from the March earthquake and central bankers had counted on fiscal spending on reconstruction and demand from emerging markets to sustain the upturn.
However, they have grown increasingly concerned that the yen's strength and Europe's debt crisis will hurt corporate sentiment and earnings and derail the recovery.
The entire expansion will come in the form of additional purchases of government bonds with no increase in private debt given corporate financing has shown little sign of strain, the BOJ said. In contrast to past expansions, the central bank did not extend the deadline for the purchases, suggesting it will be buying government debt at a faster pace.
In a rare development at the consensus-favoring central bank, former academic Ryuzo Miyao -- regarded as one of most pessimistic board members -- voted against the move. He called instead for a bigger 10 trillion yen expansion of a broader 50-trillion-yen pool for asset buying and market operations.
The increase in asset purchases came as little surprise to markets in terms of size, even if investors were unsure about the timing, and failed to weaken the yen, which stood around 75.98 to the dollar.
"Foreign investors may be disappointed that the BOJ didn't deliver something extra. They may buy back the yen in London trading hours," said a senior trader for a Japanese bank.
Analysts said that while Thursday's move was largely motivated by concerns about the yen's strength, they were skeptical whether it was enough to make a difference.
"Bringing down long-term interest rates is effective in weakening the yen," said Hideo Kumano, chief economist at Dai-Ichi Life Research Institute. "The BOJ decided to focus on increasing JGB purchases this time, but why didn't they decide to buy JGBs with maturities exceeding two years?"
European leaders on Thursday agreed on a comprehensive package of measures to tackle the euro zone's sovereign debt crisis, offering some relief to Japanese policymakers worried that the crisis may start to hurt its economy as well as emerging Asian nations that are key markets for Japanese goods.
But the yen hovered near a record high of 75.709 set on Wednesday, keeping alive the threat of intervention by Japanese authorities and putting the BOJ under pressure for a policy response.
The BOJ stuck to its view that Japan's economy continues to pick up and will resume a moderate recovery. But it justified easing now by warning that it will take time for Japan to overcome deflation and the economic outlook could undershoot its projection depending on market and overseas developments.
Finance Minister Jun Azumi repeated his warning that Tokyo may intervene in the currency market and expressed hope that the BOJ will work with the government to support the economy.
"We stand ready to take firm measures on currencies if necessary. I want to monitor moves during trading in Tokyo today," he told reporters before the BOJ decision on Thursday.
In a twice-yearly outlook report due out later in the day, the BOJ is expected to cut its economic forecasts on slowing global growth and project that core consumer inflation will be stuck near zero until early 2014 -- signaling that interest rates will be kept ultra low for years to come.
The BOJ previously eased policy by boosting its asset buying pool in August, acting in tandem with the Finance Ministry, which ordered Japan's biggest-ever single-day currency intervention, selling more than 4.5 trillion yen.
The impact proved short-lived, however, and the yen crawled back to trade close to its record highs.
This has been a source of deepening frustration for Japanese officials, who argue that a yen rally is one problem too many for a nation grappling with a nuclear crisis, a $250 billion post-quake rebuilding effort and ballooning debt.
($1 = 75.990 Japanese Yen)
(Additional reporting by Rie Ishiguro, Stanley White, Kaori Kaneko and Tetsushi Kajimoto; Editing by Tomasz Janowski)