The Bank of Japan (BOJ) yesterday shifted key policies to target interest rates instead of its money-printing program and recommitted to reaching its elusive 2 percent inflation goal as quickly as possible.
It held off on deepening negative interest rates or expanding asset purchases, saying the modification is aimed at resetting its stimulus program for a protracted battle to hit the price growth goal.
While Japanese stock prices rose and the yen weakened after the announcement, some analysts doubted whether the move would have a lasting positive effect 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 yesterday, the bank abandoned its base money target and instead adopted “yield curve control,” under which it will buy long-term Japanese government bonds to keep 10-year bond yields at current levels of about 0 percent.
It maintained the 0.1 percent negative interest rate it applies to some of the excess reserves that financial institutions park with the central bank.
The bank said it would continue to buy long-term government bonds at a pace that ensures its holdings increase by ￥80 trillion (US$781 billion) per year.
According to the new framework that adds yield curve control to its current quantitative and qualitative easing (QQE), the bank 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.
Under QQE, the bank has been increasing base money — or the amount of money it prints — at an annual pace of ￥80 trillion.
Analysts have said the central bank 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.
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