The Bank of Japan has overhauled its monetary policy framework, switching to targeting interest rates and sidelining more than three years of massive money printing that did little to stimulate the economy.
But the central bank held off on deepening negative interest rates or expanding its asset purchase target, Reuters reports.
It clarified that the modification is aimed at resetting its stimulus program for a protracted battle to hit and then keep to its 2 percent inflation goal.
Japanese stocks rose and the yen fell on Wednesday on hopes the BOJ’s decision to reset its stimulus program would ease pressure on the country’s banks and insurers.
But some analysts doubt whether the move would have a lasting positive impact on financial markets.
“The impression is that the BOJ is starting to pull back some of its troops from the battlefront,” said Katsutoshi Inadome, senior fixed-income strategist at Mitsubishi UFG Morgan Stanley Securities.
“The markets could now begin testing the BOJ’s commitment to its price target in the next few months.”
BOJ governor Haruhiko Kuroda said directly targeting interest rates could work more effectively to raise inflation expectations than focusing on base money.
“It’s very effective in the long-term perspective. But in the short term, there isn’t a clear link between the base money target and inflation expectations,” Kuroda told a news conference.
“That’s why the new policy framework can respond to changes in the economy and prices more flexibly.”
At the two-day rate review that ended on Wednesday, the BOJ abandoned its base money target and instead adopted “yield curve control” under which it will buy long-term government bonds to keep 10-year bond yields at current levels around zero percent.
It will continue to buy long-term government bonds at a pace that ensures its holdings increase by 80 trillion yen (US$781 billion) per year.
It also maintained the 0.1 percent negative interest rate it applies to some of the excess reserves that financial institutions park with the central bank.
– Contact us at [email protected]