The Bank of Japan (BoJ) has taken markets by surprise with the announcement that it will increase the size of its asset purchase fund to 55trn Yen (77.46bn pounds), from 45trn before.

Only 5 of the 21 analysts canvassed by Bloomberg had expected such a move.

The action has been taken in a bid to weaken the Yen and - it is thought - in reaction to increasing political pressure to take measures, although it remains to be seen how effective they will be.

It is frequently thought that central banks are in a sort of a "race" to defend or weaken their currencies, although not all observers subscribe to that opinion.

Possibly helping the BoJ in its efforts, as the Financial Times points out this morning, are the country´s legions of small speculators, who may react to any signs of yen weakening by acquiring more foreign assets, thus weakening the currency and doing the BoJ´s work.

Precisely in this regard, recent research by Morgan Stanley points to short-term hedging by Japanese speculators as the main culprit behind the recent haven flows into the Japanese unit.

One must keep in mind that given deflation some Japanese financial assets can sometimes be fairly attractive, at least in the very short-term.

So far this year, and once adjusted for inflation, the yen has only risen by 3.7%, but in the last five years it has appreciated by no less than 45%.

Furthermore, economic activity in Japan is expected to contract this quarter, after year-on-year gains of 5.3% at the start of 2012 (in no mean part due to the reconstruction efforts undertaken in the aftermath of the Fukushima disaster).

Hence, the central bank today also downgraded its economic assessment, saying that Japan's growth has "come to a pause." Overseas economies, meantime, are described as having moved "somewhat deeper into a deceleration phase."

The initial reaction in FX markets was rather moderate, with the dollar/yen cross rising by approximately 0.7% to the 79.2 yen mark.

As an aside, a senior adviser to the Chinese government called overnight for boycotting Japanese debt markets, so as to bring the country "to its knees."

Lastly, and in another important move, Japan´s monetary authority removed minimum bidding yields for purchases of government and corporate bonds, so as to buttress demand following weak demand at the latest auctions.

AB

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