The Bank of Japan decided Friday to expand its monetary easing policy to prop up the world's third-largest economy amid sluggish domestic spending and economic uncertainty abroad, but the move disappointed investors.
The bank will nearly double purchases of exchange-traded funds to 6 trillion yen (57. 7 billion dollars) from 3.3 trillion yen, it said in a statement released after a two-day monetary policy meeting.
The move comes amid intense pressure from Prime Minister Shinzo Abe's government on the bank to match his stimulus plans with more monetary easing.
The premier said Wednesday Tokyo will adopt the stimulus package worth more than 28 trillion yen next week to revive the economy as his government has failed to achieve long-term economic growth.
"Promoting monetary easing and arranging an extremely accommodative financial environment will create synergy effects with the government's efforts," Bank of Japan Governor Haruhiko Kuroda told a news conference.
The decision, however, sent the benchmark Nikkei 225 Stock Average down as much as 1.8 per cent, and the yen briefly up 1.9 per cent against the dollar. The Nikkei erased earlier losses and ended the day up 0.56 per cent.
Kuroda instructed his staff to carry out a "comprehensive assessment" of the effects of the bank's monetary easing measures on the economy and consumer prices at its next meeting in September.
"We will conduct a comprehensive review from the perspective of finding out what is needed to achieve the 2-per-cent price stability target as early as possible," Kuroda said.
The central bank cut its economic growth forecast for the current financial year amid concerns about the rising yen, slow growth in China and the possible negative impact from Britain's decision to leave the European Union.
The bank expected the economy to expand 1 per cent in the year through March 2017, revised down from April estimates of 1.2-per-cent growth.
The bank also predicted Japan's consumer price index will inch up just 0.1 per cent for the year, down sharply from the 0.5 per cent predicted three months ago, and far below the 2-per-cent target it set in April 2013.
The bank said in a statement the economy "has continued its moderate recovery trend, although exports and production have been sluggish due mainly to the effects of the slowdown in emerging economies" such as China, Japan's largest trading partner.
Friday's decision comes after official figures showed that the country's consumer prices declined 0.5 per cent in June from a year earlier, marking the steepest drop since March 2013, one month before the central bank introduced monetary easing.
The reading represented the fourth consecutive month of year-on-year falls in consumer prices and once again showed the economy slipping back into deflation amid falling global energy prices.
On Friday, the bank also decided to leave unchanged the policy of imposing a 0.1-per-cent charge on some of the reserves held by financial institutions. The negative interest rate policy was introduced in January.
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