BOJ shifts policy framework to target government bond yields

The Bank of Japan made an abrupt shift on Wednesday to targeting interest rates on government bonds to achieve its elusive inflation target, after years of massive money printing failed to jolt the economy out of decades-long stagnation.

While the BOJ reassured markets it would continue to buy large amounts of bonds and riskier assets, the policy reboot appeared to open the door for an eventual winding down of its huge asset purchases, and tried to repair some of the damage caused by its shock move to negative rates early this year.

“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 UFJ Morgan Stanley Securities.

The BOJ’s increasingly radical stimulus efforts are being closed watched by other global central banks which are also struggling to revive growth, such as the European Central Bank. Many investors fear central banks have nearly exhausted the limits of what monetary policy can do, putting pressure back on governments to step up spending.

Japan’s Prime Minister Shinzo Abe welcomed the BOJ’s shift and said the government would work with the central bank to boost his “Abenomics” economic growth program.

“The government and the BOJ will work as one in close coordination to accelerate Abenomics,” he told a Reuters Newsmaker event in New York.

In setting rate targets for financial institutions’ excess cash deposits and 10-year government bonds, the BOJ looked set to exert unprecedented control over bond market rates to try to spark life into the world’s third-largest economy.

Japanese stocks rose nearly 2 percent after the move, which could ease profit pressure on banks and insurers from ultra-low interest rates, though analysts doubted the impact would trickle down much into the broader economy.

In a bid to reassure nervous markets, the BOJ maintained its 0.1 percent negative rate and said it would continue buying government bonds at the current pace for the time being.