BOJ eases policy with modest increase in ETF buying

By Leika Kihara

TOKYO (Reuters) - The Bank of Japan expanded monetary stimulus on Friday through a modest increase in purchases of exchange-traded funds (ETF), yielding to pressure from the government and financial markets for bolder action to spur growth and accelerate inflation towards its 2 percent target.

But the central bank maintained its base money target at 80 trillion yen ($775 billion) as well as the pace of purchases for other assets including Japanese government bonds.

It also left unchanged the 0.1 percent interest it charges to a portion of excess reserves financial institutions park with the central bank.

The BOJ said it will increase ETF purchases so that its total holdings increase at an annual pace of 6 trillion yen, up from the current 3.3 trillion yen. The decision was made by a 7-2 vote.

By coordinating its action with the government's big fiscal spending package, the BOJ likely aimed to maximise the effect of its measures on the world's third-biggest economy, which is struggling to escape decades of deflation.

"The BOJ believes that (today's) monetary policy measures and the government's initiatives will produce synergy effects on the economy," the central bank said in a statement announcing the policy decision.

The BOJ also said it will conduct a thorough assessment of the effects of negative interest rates and its massive asset buying programme at its next rate review.

Pressure for BOJ action has intensified leading up to the rate review with Japan's economy minister urging the bank to work with the government to spur growth in the wake of Prime Minister Shinzo Abe's announcement of a bigger-than-expected 28 trillion yen stimulus package on Wednesday.

Worried about their dwindling policy options, some BOJ policymakers have openly expressed doubts over the feasibility of expanding an already massive stimulus programme that has failed to boost inflation.

But analysts say the BOJ likely had little choice but to ease, with markets almost fully pricing in action and Abe having put the ball into the bank's court by unveiling his big spending plan days before its policy meeting.

The BOJ has stood pat on policy since January when it added negative interest rates to its massive asset-buying programme in a fresh attempt to accelerate inflation toward its 2 percent target.

($1 = 103.1500 yen)

(Additional reporting by Stanley White, Tetsushi Kajimoto and Minami Funakoshi; Editing by Chang-Ran Kim and Edmund Klamann)