UPDATE 4-Under pressure from PM-elect, BOJ boosts stimulus again

* BOJ expands asset purchases by Y10 trln as expected

* BOJ will review its 1 pct inflation target in January

* BOJ offers gloomy assessment of Japan economy

* Shirakawa wants policy flexibility, govt efforts

* Board member makes solo proposal for zero rate

By Leika Kihara

TOKYO, Dec 20 (Reuters) - The Bank of Japan delivered its

third shot 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 bolder

action to beat deflation.

It also signalled setting a higher inflation target at its

next meeting in January, when a new government will be in place.

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.

Feeling the heat, the central bank expanded its asset-buying

and lending programme by 10 trillion yen ($119 billion) to 101

trillion yen, a widely expected move that barely moved markets.

"I take it as that the BOJ is carrying out what we sought

during the election step-by-step," Abe told a party meeting.

The incoming prime minister caused a brief stir when he

said that BOJ Governor Masaaki Shirakawa had telephoned to

inform him of the decision in the morning - when the policy

meeting was still taking place. The LDP later said the remark

was a slip of the tongue and Shirakawa told a news conference he

made the call in the afternoon, after the meeting was over.

With the latest move, the BOJ has expanded asset purchases

five times this year, the most frequent activity during a single

year in a decade. The last time it eased so many times was in

2001, when Japan was battling a domestic banking crisis.

"The next step is inflation targeting. The BOJ will come up

with something that's just enough to avoid criticism from Abe

but probably not enough to avoid some sense of disappointment,"

said Masamichi Adachi, senior economist at JPMorgan Securities

in Tokyo.

"Abe is not even prime minister yet. If you look at how the

BOJ is behaving, you could argue this is a loss of

independence."

LONG-TERM TARGET

The BOJ now has a 1 percent inflation target in place, and

defines a range of zero to 2 percent consumer inflation as a

desirable level of long-term price growth.

The central bank said it would review that guideline next

month. It will probably clarify that, after 1 percent inflation

is in sight, it will aim to achieve 2 percent inflation.

Shirakawa admitted that Abe's request for setting a 2

percent inflation target was partly behind the central bank's

decision to review its long-term price goal.

But he warned that in doing so, the BOJ would ensure that

its policy flexibility was protected and take into account the

fact that Japan has long suffered from deflation even as other

advanced economies experienced inflation.

"We must bear in mind the fact that inflation has been low

in Japan for a long time," Shirakawa told a news conference.

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.

But 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.

Abe also said that once he takes over as primes minister on

Dec. 26 he would instruct his new cabinet ministers to begin

working with the BOJ on setting a shared inflation target.

GOVERNMENT ACTION ALSO NEEDED

The yen has fallen almost 9 percent against the dollar since

September, as Abe's emergence as the likely next prime minister

raised expectations of more expansionary policy and spending.

The dollar briefly edged up to around 84.39 yen after

the BOJ's decision, but quickly slid back down as markets saw

its action as lacking any surprises.

While Abe's prescription has had the desired market effect

so far, pushing down the yen and driving the benchmark Nikkei

stock average above 10,000 for the first time in more than eight

months, analysts say pumping cash into the economy will only

give it a temporary boost unless followed by efforts to lift

Japan's growth potential and contain runaway debt.

Some in the BOJ, particularly officials close to the

conservative 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.

"Japan's economy is weakening further and is expected to

remain weak for the time being," the central bank said, offering

a gloomy assessment of the world's third-largest economy

currently enduring its fourth recession since 2000.

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.

Shirakawa pushed back, warning that the BOJ would never buy

bonds for the purpose of monetising public debt. He also said

government efforts, such as deregulation, must accompany easy

monetary policy for Japan to exit deflation.

But the governor, whose five-year term ends in April next

year, suffered revolt even from within the BOJ board.

Board member Koji Ishida, a former commercial banker,

proposed - albeit unsuccessfully - scrapping a 0.1 percent

interest paid to excess reserves financial institutions park

with the BOJ, something Shirakawa has resisted doing so for fear

of distorting proper market functions.

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