The Bank of Japan on Tuesday further eased monetary policy, increasing its asset purchase programme by 10 trillion yen ($130 billion) to about 65 trillion yen, as it looks to end deflation.

This file photo shows the Bank of Japan headquarters in Tokyo.

It also said its policy board voted unanimously to keep the key interest rate unchanged at between zero and 0.1 percent.

"For the time being, the bank will pursue powerful monetary easing by conducting its virtually zero interest rate policy and by implementing the Asset Purchase Program mainly through the purchase of financial assets," the BoJ said in a statement.

The easing, which follows a similar step in October, is intended to help nudge the year-on-year inflation rate to 1.0 percent, the bank said.

"The outlook for Japan's economy continues to entail high uncertainty regarding the prospects and outcomes of the European debt problem, the supply and demand balance of electricity and the effects of the yen's appreciation," it said.

"The goal of overcoming deflation will be achieved through such efforts to strengthen growth potential and support from the financial side," the bank said.

The BoJ action strengthened the dollar against the Japanese unit, with the greenback buying 77.92 yen, up from 77.59 before the announcement, while the benchmark Nikkei index moved into positive territory in afternoon trade.

The Nikkei was 0.65 percent up at 9,057.50 at about 0430 GMT, after ending the morning session 0.15 percent lower at 8,985.79.

The additional easing "was certainly a surprise to the currency market," UBS senior dealer Hirotsugu Inoue told Dow Jones Newswires.

Additional easing by a central bank increases the supply of money in the economy, therefore weakening the currency.

The move comes a day after Japan said its economy shrank a worse-than-expected 2.3 percent on an annualised basis in the final three months of 2011, owing to the strong yen, falling overseas demand and record flooding in Thailand that hammered production.

The world's number-three economy shrank 0.6 percent quarter-on-quarter, the Cabinet Office said, and 0.9 percent through 2011. It grew 4.4 percent in 2010.

The contraction was more severe than the annualised 1.6 percent drop forecast by economists surveyed by Dow Jones Newswires.

It also sharply contrasted with a revised 7.0 percent annualised growth for the July-September period, which was in part boosted by post-March 11 reconstruction.