* 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
"Abe is not even prime minister yet. If you look at how the
BOJ is behaving, you could argue this is a loss of
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.