TOKYO, Dec 19: The central bank said it would pump more cash into Japan’s financial system to support the faltering economy while the government admitted on Wednesday it expects zero growth next fiscal year.

Analysts described the Bank of Japan’s action as meaningless with huge amounts of cash already flooding the banking system and interest rates effectively at zero.

They also said the government’s target of zero economic growth in the year to March 2003 was too optimistic.

The Bank of Japan said the economy was continuing to deteriorate.

“Today’s decision is intended to ensure that the financial markets continue to work in a stable manner and that economic recovery will be effectively supported from the monetary side,” the BoJ said in a statement.

The BoJ policy board decided by majority vote to target current account reserves at the bank at around 10-15 trillion yen ($78-117 billion), up from the current level of over six trillion yen.

It also said it would also increase long-term government bond purchases to 800 billion yen a month from 600 billion yen, which would also increase liquidity in the financial system.

“I appreciate today’s policy decision and I think the Bank of Japan has made a very important move... as it suggests it is shifting away from conventional policy,” said State Minister for Economic and Fiscal Policy Heizo Takenaka.

The BoJ also said it would help commercial banks accept commercial paper and asset-backed securities from firms as collateral for loans in a bid to boost lending. No details were provided on the extent of risky assets the central bank would be willing to accept.

Analysts warned the move could help firms that should be allowed to fail.

Political pressure has mounted on the Bank of Japan to take further measures to restore growth to the economy, with consumer prices sliding for 26 straight months.

But analysts said the bank’s actions on Wednesday would not help the economy and showed it was prepared to bow to pressure.

Credit Suisse First Boston Yasushi Okada said the bank had previously said it had done everything it could for the economy and he questioned why it had decided to act now.

“(Either) they didn’t believe what they were saying, or they have no idea what they should do,” he said.

“It shows in the long run, when push comes to shove, it’s the BoJ that will blink first,” said Ron Bevaqcua, senior economist at Commerz Securities Japan.

Meanwhile, Japan said on Wednesday it expects zero economic growth in the coming fiscal year and a one per cent contraction for the current year to March compared with a 0.9-per cent fall seen earlier.

“This severe condition is expected to continue, and we forecast zero growth for the fiscal 2002 year,” Prime Minister Junichiro Koizumi told a cabinet meeting to approve the latest economic forecasts.

The zero growth forecast was the lowest ever by the Japanese government ahead of a new fiscal year.

A 0.1 per cent revision in this year’s gross domestic product (GDP) forecast was based on an assumption the economy would contract an average 0.1 per cent in the last two quarters of the fiscal year.

“The nation’s economy is continuing to deteriorate, while the risk of (global) recession is increasing following the terrorist attacks in the United States,” the government said.

“While unemployment has reached unprecedented levels, deflation is developing,” it said.

The Japanese economy sank into recession for the third time in a decade over the June and September quarters, pushed down by weak demand and escalating deflation.

GDP fell 0.5 per cent in the September quarter from the previous three months, and fell 1.2 per cent from April to June. Most economists are forecasting a further contraction in the December quarter as bankruptcies mount and unemployment continues to hit record highs.

“The first ever zero-growth target is a sign that the government is at last facing up to reality,” said Hitoshi Suzuki, an analyst at Daiwa Research Institute.—AFP