On Wednesday, The Bank of Japan made changes in key policies 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 expanding asset purchases or deepening negative interest rates, saying that the modification as aimed at resetting its stimulus programme for a protracted battle to hit the price growth goal.
Some analysts doubted whether the move will have a lasting positive impact on the market, while Japanese stock prices rose and the yen weakened after the Bank of Japan’s announcement.
Senior Fixed-Income strategist at Mitsubishi UFG Morgan Stanley Securities – Katsutoshi Inadome said that the impression is that the Bank of Japan is starting to pull back some of its troops from the battlefront.
The global market could now begin testing the commitment of Bank of Japan to its price target in the next few months.
The Bank of Japan 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 Bank Of Japan said that 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.
It said that the Bank of Japan will seek to lower real interest rates by controlling long term and short term interest rates, which would be placed as the core of the new policy framework.
Under QQE, the Bank of Japan 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 that the Bank of Japan will struggle to buy enough bonds in the coming years with its huge purchases draining liquidity.
It decided in the month of January to add negative rates to QQE.
