By Mayumi Otsuma
Tokyo, April 30 (Bloomberg) -- Japan's central bank unexpectedly decided to add more cash to the economy, trying to avoid the nation's fourth recession in 12 years and spur a recovery in the Nikkei 225 stock average from a 20-year low.
The bank raised its target for reserves it makes available to lenders to as much as 27 trillion yen ($226 billion) from a maximum of 22 trillion yen. The bank kept monthly government bond purchases unchanged at 1.2 trillion yen and didn't say how it planned to increase the supply of money for banks.
``Stock price developments, especially those of bank stocks, remain weak and volatile,'' the central bank said in a statement. ``Careful attention is warranted so that stock-price developments will not negatively affect financial markets and economic activity.''
The Nikkei 225 Stock Average's drop to a 20-year low this week added to pressure on newly appointed central bank Governor Toshihiko Fukui to boost the world's second-largest economy. Plunging share prices are inflicting investment losses on banks such as Mizuho Financial Group Inc., cutting their capital.
Mizuho Financial Group, the world's largest bank by assets, said it had a 2.38 trillion yen loss in the year to March 31, a record for a Japanese company, citing the declining value of its shareholdings.
Pumping more money into the banking system is among the few tools left to the Bank of Japan since it cut interest rates almost to zero in March 2001. Today's decision to increase reserves made available to banks was unanimous, the bank said.
Bad Loans
To add money to the economy, the Bank of Japan buys securities such as government bonds from banks and credits the sellers' accounts at the central bank. Because the money earns no interest, banks have an incentive to use it to make loans.
Increasing the level of reserves hasn't stopped a six-year slide in lending by Japan's banks, which are struggling to write off bad loans estimated by the government at 52.4 trillion yen.
``Clearly, the BOJ has become more concerned with the pace of decline in the Nikkei and has sought to try to allay fears that this would impact on the economy,'' said Robert Rennie, senior currency strategist at Westpac Banking Corp. ``However, it is a policy that has been found wanting.''
The yen was at 119.38 to the dollar at 3 p.m. from 119.76 late yesterday in New York.
There is ``considerable uncertainty'' about the outlook for the recovery of the U.S. and European economies, the bank said. It added that it's worried about the effects of a deadly virus on Asian economies.
Stock Plunge
The bank also said it would start to accept loans by commercial banks to the Industrial Revitalization Corp. as collateral in its money-market operations.
The Nikkei fell 1.2 percent to 7607.88 two days ago, the lowest close since Nov. 9, 1982. The Nikkei rose 2.8 percent to 7823.74 as of 3 p.m. today in Tokyo.
Five years of falling prices have sapped corporate profits in Japan, leaving exports as one of the main drivers of economic growth. Exports, which accounted for half of growth in the fourth quarter, fell for third time in four months in March.
Japan's industrial production fell unexpectedly in March as the war in Iraq curbed demand for exports. Industrial production fell a seasonally adjusted 0.2 percent from February, the Ministry of Economy, Trade and Industry said today. That compares with a 1.5 percent median gain forecast by 28 economists in a Bloomberg News survey. Inventories fell 0.7 percent in March to a record.
Unemployment Rises
Sales at Japanese retailers fell in March for the first time in three months as consumers cut back in the face of rising unemployment and lower wages.
Sales at supermarkets, department stores, restaurants and other retailers fell 1.2 percent in March from February, seasonally adjusted, a government report said Monday.
The unemployment rate rose to 5.4 percent in March, higher than expected, as companies such as Tokyo Electron Ltd. cut jobs in an economy that some analysts forecast will have its fourth recession in 12 years. Unemployment is just below the record 5.5 percent reached in January.
Prime Minister Junichiro Koizumi and Finance Minister Masajuro Shiokawa last week said the government has no measures to lift stock prices, such as tax incentives for stock investment or more government spending.
``The Bank of Japan is being burdened with the task of finding solutions,'' said Akio Yoshino, who helps manage the equivalent of $19 million in assets at SG Yamaichi Asset Management Co.
SARS
Slowing growth in the U.S., Japan's biggest export market, also threatens Japan's economy. Severe Acute Respiratory Syndrome threatens to sap growth in Asia, which accounts for two-fifths of Japan's exports.
The U.S. economy expanded at a 1.6 percent annual rate in the first quarter, a government report showed last week, less than the 2.4 percent rate projected by economists surveyed by Bloomberg News.
Japan's economy probably shrank 0.3 percent in the first three months of this year and will probably contract 0.1 percent this quarter, according to the median of 10 economists' forecasts in a Bloomberg News survey.
All 14 economists surveyed by Bloomberg News said they expected the bank to leave policy unchanged at today's meeting. Some economists said they expected the bank to act within a few months to expand its plan to buy shares from banks or buy new types of assets, such as exchange-traded funds or real estate investment trusts.
The central bank will first have to work out details of its plan to buy asset-backed commercial paper and asset-backed securities. The plan is meant to give companies an alternative to borrowing from banks, which have reduced lending for six years as they struggle to write off an estimated 52.4 trillion yen of bad loans.
Minutes of today's meeting will be published on June 16.

Wij van de redactie zien door deze maatregel wel nieuwe mogelijkheden in de Japanse markt.
Dit kan door middel van aandelen beleggen, maar ook in beleggingsfondsen van de Banken en het intereffect Japanse warrants.
Dit laatste fonds heeft een hefboomeffect en de prijs van rond de EUR 1 biedt zeker kansen op de korte en langere termijn.