The Bank of Japan will increase the amount of government bonds it buys each month by a quarter, to ?1 trillion (US$7.5 billion), and urged the government to speed the disposal of bad debt and reform taxes to revive the economy.
Central bank Governor Masaru Hayami and his eight policy-setting colleagues sent a message that they're unimpressed by government measures, which it announced on Wednesday, aimed at stamping out deflation, which rest on clearing bad loans faster and making it harder to profit from betting shares will fall.
"It's extremely important that we ensure the stability of the markets and preempt a deflationary spiral," the central bank said.
"It's vital to make progress in structural reform. The bank strongly hopes the government will take more determined and effective steps."
The decision to accede to a government request to buy more bonds may be a ploy by Hayami to pressure Prime Minister Junichiro Koizumi into pumping taxpayer money into banks to shore up capital, as Hayami urged at a meeting between the two earlier this week, analysts said.
"The bank has taken a step forward before the government did," said Yukari Sato, a senior economist at Nikko Salomon Smith Barney Ltd. "The message is that the bank expects the government to jump on reforms and act."
Bonds were unchanged after the decision. "The move may do little to lift the economy as money won't circulate into the economy from the banking system," said Yoshiichi Taguchi, who helps oversee about 2 trillion yen in fixed-income assets at Tokio Marine & Fire Insurance Co.
The yield on the most recently sold 10-year bond fell 1.5 basis point to 1.525 percent. A basis point is 0.01 percentage point.
Yesterday's decision to increase the amount of bonds the bank buys from investors each month means it will soak up 40 percent of the ?30 trillion of new debt the government plans to sell in the fiscal year starting April 1.
"This will do nothing to help the economy," said Marshall Gittler, a currency strategist at Bank of America. "But by giving in a little, the BOJ removes any excuse the government has for inaction." Hayami hit back at government officials who have accused him of not doing enough to stoke inflation, and he prodded Koizumi to make good on election promises to overhaul the economy.
Koizumi has "repeated that there's no growth without structural reform, but I think there are no price increases without economic growth," Hayami told reporters. He even hinted that yesterday's decision will be of little benefit.
"No matter how much money we provide, the action alone can't push up prices," he said.