Japan central bank shocks markets

The BOJ stepped in with a surprise cash injection to help the world's No. 2 economy

By CNN's Alex Frew McMillan and wire reports

TOKYO, Japan -- The central Bank of Japan has surprised markets by stepping in with more help for its stagnant economy.

The BOJ already has a lax monetary policy, but opted to ease it further by raising bank reserves and vowing to buy more Japanese government bonds (JGBs).

The bank concluded a two-day policy meeting on Tuesday afternoon.

Bank Governor Masaru Hayami had so far resisted heavy pressure from Prime Minister Junichiro Koizumi's government to do more to help the world's second biggest economy.

Nikkei jumps on move, yen weakens

Analysts had expected little out of this BOJ session, but the central bank said it would increase current account deposits that are parked there to $49.0 billion (6 trillion yen), up from 5 trillion yen.

The BOJ will also up its monthly order for long-term JGBs to 600 billion yen, from 400 billion yen. That gives Japan's economy an extra jolt of money.

Investors cheered the steps. The Nikkei, already moving up 1.6 percent on Tuesday morning, closed with a 3.8 percent gain at 11,917.95.

Banks were the main gainers. Mizuho Holdings, the world's biggest bank by assets, rose 11.0 percent to 504,000 yen.

Nomura Securities Co., Japan's largest broker, rose 10.2 percent to 2,215 yen.

The yen weakened rapidly, then rallied to trade at 122.62 in later afternoon.

Government officials also welcomed the move.

"The ministry has been saying that support from an aggressive monetary policy was needed to ease deflationary pressure and promote structural reforms," Trade Minister Takeo Kiranuma said.

He added that he hopes the bank will hew to an "appropriate and flexibly monetary policy."

Heavy political pressure

The BOJ is independent but still struggling to recover from Hayami's disastrous decision to raise interest rates at a time the economy was slowing.

It has since brought rates back down close to zero. This March it switched from its traditional course of targeting interest rates -- the way the U.S. Federal Reserve Bank targets monetary policy -- to targeting bank reserves.

It is flooding banks with money, hoping that they will eventually get more aggressive in their lending.

Hayami said Tuesday he sees no need yet to set an inflation target, something officials have pushed for.

Legislation is pending to cut back the BOJ's powers.

Little room to maneuver

Tuesday's step will not stave off pressure on the BOJ for long, J.P. Morgan senior economist James Malcolm told CNN.

"It does show that the central bank is responding to political pressure, [and] economic pressure, and therefore implies that more easing might be in the pipeline," he said.

Still, he called the move conservative. Most experts say the central bank has little room to maneuver in trying to help Japan.

"There are few options left, none of which are very attractive," Malcolm said.

The country will likely have a recession made official in September, when its next set of gross domestic product numbers come out.

Friday's very weak household spending figures likely spurred the BOJ to act. They factor into GDP, which will likely be sharply down as a result. Economists already expected a drop.

The BOJ next meets September 18 to 19.

Reuters contributed to this report.