TOKYO- The Bank of Japan slightly loosened its grip on long-term interest rates on Friday and laid the groundwork to taper its huge asset purchases, as part of steps to make its stimulus sustainable enough to weather a prolonged battle to fire up inflation.
In a review of its policy tools announced after a two-day meeting, the BOJ said it would allow long-term interest rates to move up and down by 0.25 percent around its 0 percent target, instead of by the current implicit band of 0.2 percent.
To give itself more room to wind down its massive stimulus, the central bank also removed an explicit guidance to buy exchange-traded funds (ETF) at an annual pace of roughly 6 trillion yen ($55.21 billion).
Instead of buying at a set pace, the BOJ said it would step in only when markets destabilize under a 12-trillion-yen ceiling set last year when the initial COVID-19 hit jolted stock prices.
Governor Haruhiko Kuroda brushed aside the view the moves were a prelude to a full-blown exit from years of ultra-easy policy, stressing that the tweaks instead would make his stimulus sustainable and more effective.
“We won’t tolerate yield fluctuations that would have an impact on our monetary easing,” Kuroda told a briefing. “We absolutely need to make sure the effect of our monetary easing isn’t hurt. We clarified that stance with our new guidance.”
The BOJ also created a scheme similar to that of the European Central Bank under which it pays up to 0.2 percent interest to financial institutions that tap its loan programs.
As widely expected, it maintained its target of -0.1 percent for short-term rates and 0 percent for the 10-year bond yield under its yield curve control (YCC) policy.
The moves were mostly within market expectations, as BOJ officials have been dropping hints that they will allow yields to fluctuate more to breathe life back into a market made dormant by the bank’s dominance.
Among the few surprises was the BOJ’s decision to contain its purchases of ETFs to those linked to the broader Tokyo stock index Topix, which sent the Nikkei average down and the Topix surging to a 30-year high.
“The Bank of Japan’s policy review today contained various nudges to policy levers but ultimately marked neither a tightening nor an easing of policy,” Capital Economics wrote in a research note, describing the moves as a “rearrangement of furniture” ahead of a long period of status quo.
While the initial focus of the review was to let market forces drive asset prices more, Kuroda stressed the near-term priority was to keep borrowing costs stably low to support an economy hit by the pandemic.