|Politicians had been calling on Japanese officials to follow the US example of setting an inflation target [Reuters]
Japan's central bank is to pump an additional 10 trillion yen ($130bn) into the economy through a new asset purchase programme, in an effort to boost the economy and tackle deflation.
Tuesday's announcement by the Bank of Japan boosted its spending on the asset-buying and lending scheme, under which it buys government and private debt and lends funds against collateral, to about 65tn yen ($833bn).
The bank also set a consumer inflation target of one per cent, making its clearest statement yet of its intention to tackle deflationary trends that have hindered Japan's economy, such as the strength of the yen which has hurt Japanese exporters.
Additional easing by a central bank increases the supply of money in the economy, therefore weakening the currency.
The bank also left its key interest rate unchanged at a range of zero to 0.1 per cent by a unanimous vote.
"For the time being, the bank will pursue powerful monetary easing by conducting its virtually zero interest rate policy and by implementing the asset purchase programme mainly through the purchase of financial assets," the bank said in a statement.
The steps follow weeks of growing calls from politicians to follow the example of the Federal Reserve, the US central bank, and set an explicit inflation target to show greater commitment to re-inflating the economy.
The Federal Reserve last month took a historic step of setting an inflation target and extended its commitment to near zero rates, leaving the door open to more monetary easing that could further weaken the dollar and put the yen under renewed upward pressure.
"I welcome the BOJ's aggressive steps to end deflation. The government and the BOJ plan to continue to work closely together and I expect the central bank to take firm monetary policy steps when needed," said Jun Azumi, Japan's finance minister.
Japan's government is worried the economy may not be robust enough to withstand tax increases proposed to fix stretched public finances.
It has been leaning on the central bank to help keep the yen in check and support Japan's fragile recovery from last year's earthquake, tsunami and nuclear crisis.
Tuesday's steps got mixed reviews with some analysts, praising the central bank for taking more forceful action and pre-empting risks that may lie ahead, while others worried that it was caving into political pressure.
Yuichi Kodama, an economist at Meiji Yasuda Life Insurance said, "The BOJ apparently bent to political pressure, leaving the market with the impression of its vulnerability."
"If the Fed embarks on additional easing, the BOJ is likely to come under pressure again and again and it may tweak its asset purchase scheme and start buying government bonds with longer maturities."
The bank's announcement comes a day after Japan said its economy shrank a worse-than-expected 2.3 per cent on an annualised basis in the final three months of 2011, owing to the strong yen, falling overseas demand and record flooding in Thailand that hammered production.