Japan's central bank relaxed its already ultra easy monetary policy further today in an attempt to prevent the economy from tumbling deeper into recession and to avert a cash squeeze at the country's ailing banks.
The central bank said it would step up purchases of Japanese government bonds to 800 billion yen ($6.25 billion) a month from 600 billion and consider buying a broader range of financial assets in its money market operations, including securities backed by mortgages and cash-flow from real estate.
Economists saw the easing steps, which were more aggressive than expected, as the latest bid by the Bank of Japan to cajole the ruling Liberal Democratic Party to push through drastic banking and budget reforms needed to restore growth and halt a pernicious slide in prices.
"The deterioration in Japan's economy is broad-based, and severe adjustments are likely to continue in the near term," the BOJ said in a statement explaining a raft of measures to pump more liquidity into a banking system already awash in cash.
Japan is suffering its third recession in eight years, and most private economists expect the economy will shrink in the fiscal year starting on April 1st for the second year in a row.
But the government said it was not so pessimistic. Thanks to a second extra budget it is compiling worth about 2.5 trillion yen ($19.5 billion), it said it expected the economy to be flat next year after shrinking 1.0 percent this year.
With Japanese interest rates already near zero, banks reluctant to lend and companies equally wary of borrowing more, economists doubted the free extra cash would translate into a borrowing and spending splurge.
Japanese bank shares have been falling hard lately with investors despairing of action to clean up the financial system - possibly the biggest of Japan's many economic troubles.
The BOJ is especially keen to avoid a cash squeeze - which could be fatal for some walking-dead companies - as businesses, banks and investors scurry to cover massive year-end settlements.
"The decision shows that the Bank of Japan feels the urgency to act, so I think financial markets will take it positively. But today's decision will not solve the fundamental problem," said Mr Tomoko Fujii with Nikko Salomon Smith Barney in Tokyo.
What is needed, according to Honda Motor president Mr Hiroyuki Yoshino, is a determined effort by Prime Minister Junichiro Koizumi to overcome objections to radical reforms within his LDP.
"He seems to be meeting a lot of resistance," Mr Yoshino said. "If Japan doesn't push through with reform, then it's just going to slide downhill."