7:00 PM Tokyo – Stocks in Japan closed sharply higher after the Bank of Japan left its key lending rate at 0.1% and expanded short term direct lending program to $220 billion. The sharp increase in the program only highlights the difficulties faced by borrowers and bank’s lack of willingness to extend new loans.

Stocks in Japan rose the most in eight weeks after Bank of Japan today announced that it will expanding its fixed-rate direct lending operation and the service industry demand increased in January.

Loans to be provided through this operation will double to approximately 20 trillion yen or $220 billion.

In Tokyo trading Nikkei 225 Stock Average increased 1.2% or 125.27 to 10,846.98, and the broader Topix Index advanced 1% to 947.43.

In the first section of the Tokyo Stock Exchange 7.9 billion shares worth 512 billion yen were traded and in the second section 155 million shares valued at 2 billion yen changed hands.

Of the Nikkei 225 index stocks, 194 gained, 24 decreased, and 7 were unchanged. Mitsui Mining & Smelting led gainers in the index shares with a rise of 5.8%.

Other commodity stocks gained as gold prices jumped 1.5% to $1,122 per ounce and crude oil prices soared 0.6% to $82.2 per barrel. Nippon Oil edged up 3.8% to 488 yen and Nippon Mining House climbed 3.7% to 454 yen.

Bank of Japan Holds Key Rate at 0.1%

Bank of Japan left its key rate at 0.1% and expanded its direct lending program to avoid the liquidity trap that most banks are in.

The central bank will expand its fixed-rate fund-supplying operation “to encourage a decline in longer-term interest rates by substantially increasing the amount of funds to be provided through the fixed-rate operation.”

The pace of economic growth is likely to be moderate until around the middle of fiscal 2010 and is forecasted to gradually rise thereafter.

The fixed-rate direct lending operation against pooled collateral will have duration of three months and will he held twice a week, while the amount of loans provided at each operation will be approximately 800 billion yen.

Loans to be provided through this operation will increase to approximately 20 trillion yen from the current amount of approximately 10 trillion yen.

Service Demand Rises 2.9% in January

Japan’s Ministry of Economy, Trade and Industry reported that the indices of tertiary industry activity rose 2.9% to 98.7 in January.

Industries that contributed to the increase are wholesale and retail trade 5.2%; miscellaneous services 6.1%; information and communications 3.4%; medical, health care and welfare 2%; transport and postal activities 2.1%; scientific research, professional and technical services 2.9%.

Electricity, gas, heat supply and water gained 2%; real estate and goods rental leasing 0.3%; accommodations, eating and drinking services 0.1% and compound services 0.4%.

Industries that contributed to the decrease were finance and insurance 1.1%; living-related and personal services and amusement services 0.7% and learning support 0.7%.

Nikkei Movers

Shinsei Bank, Limited led the decliners in the Nikkei 225 Stock Average with a loss of 1.8% followed by losses in Tokyu Corp of 1.5%, in Sapporo Holdings Ltd of 1.3%, in Dainippon Sumitomo Pharma Co., Ltd 1.1% and in Taiyo Yuden Co., Ltd 0.9%.

Mitsui Mining and Smelting Company, Limited led gainers in the Nikkei 225 Stock Average with a rise of 5.8% followed by gains in Credit Saison Co., Ltd 5.2%, in Nippon Soda Co., Ltd of 4.8% and in Furukawa Co Ltd 4.7%.