The Bank of Japan shifted key policies on Wednesday to target interest rates instead of its money-printing programme, and recommitted to reaching its elusive 2% inflation goal as quickly as possible.
But it held off on deepening negative interest rates or expanding asset purchases, saying the modification as aimed at resetting its stimulus programme for a protracted battle to hit the price growth goal.
While Japanese stock prices rose and the yen weakened after the BOJ’s announcement, some analysts doubted whether the move will have a lasting positive impact on the market.
“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.”
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 0%.
It maintained the 0.1% negative interest rate it applies to some of the excess reserves that financial institutions park with the central bank.
The BOJ said it would continue to buy long-term government bonds at a pace that ensures its holdings increase by 80 trillion yen ($781 billion) per year.
Under the new framework that adds yield curve control to its current quantitative and qualitative easing (QQE), the BOJ will deepen negative rates, lower the long-term rate target, or expand base money if it were to ease again, the central bank said in a statement announcing the policy decision.
“The BOJ will seek to lower real interest rates by controlling short-term and long-term interest rates, which would be placed as the core of the new policy framework,” it said.
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Under QQE, the BOJ has been increasing base money – or the amount of money it prints – at an annual pace of 80 trillion yen ($783 billion). But analysts have said the BOJ will struggle to buy enough bonds in coming years with its huge purchases draining liquidity.
It decided in January to add negative rates to QQE.