TOKYO (AFX-ASIA) - The Bank of Japan announced a return to zero call rates through a new policy approach targetting the level of reserves held with the central bank and focussed specifically on halting the decline in core CPI.
Analysts said the BoJ had gone beyond market expectations by establishing an effective inflation target, although the bank emphasized that its approach was simply aimed at halting deflation and giving momentum to economic growth.
The BoJ may now have made its last policy move for some time, with some analysts seeing a return to positive CPI growth unlikely for the next two years.
They said the market's focus will now shift to the government and what it will do to resolve the bank's bad debt problems.
After an initial slide on the policy board's decisions, the yen recovered somewhat against the dollar, with analysts mixed on whether the BoJ's move will eventually be positive for the currency as well as for bonds.
At 7:40 pm Tokyo time, the yen was trading at 122.62 to the dollar, compared with 123.60 just after the BoJ announcement and 123.06 just before.
The BoJ's monetary policy board decided, by a majority vote, to boost outstanding reserves held by financial institutions at the central bank to around 5 trln yen from slightly over 4 trln at present.
It added that it will increase long-term Japanese government bond purchases from the secondary market from the current 400 bln yen per month, with an upward limit, if the bank judges it needs to supply funds into the system smoothly.
The BoJ said it will switch its major operational target to the level of bank reserves from the overnight call rate, which will fall from the present target rate of 0.15 pct to move around zero as a result of the new operations.
It said it will maintain the new approach until year-on-year movement in core CPI, excluding perishable foods, moves above zero in a stable manner.
"The Bank of Japan, with these measures, aims to prevent continued declines in prices and to pave the foundations for sustained economic growth," it said.
"The economy, due to the influence of a rapid deceleration of overseas economies, saw moderation in its recovery tempo since late last year and came to a state of standstill.
"Prices, in the meantime, continue to weaken and there is concern that downward pressure on prices stemming from weak demand may strengthen henceforth," the BoJ said.
The Bank of Japan said it expects the monetary base, a combination of BoJ reserves and cash, to start showing year-on-year growth of 7 pct within six months, from 3 pct currently, due to its new operations.
However, it said that the new approach should not be seen as inflation targeting, adding that it "simply outlines the BoJ's resolution to prevent sustained falls in prices for the sake of sustained economic growth."
The BoJ also said that despite the plan to increase Japanese government bond purchases from the secondary market, it does not intend to increase outright purchases "for the sake of supporting bond prices or budget financing."
In a briefing following the announcement, BoJ governor Masaru Hayami said he has "absolutely no plan" to monetise government debt despite today's announcement.
The BoJ will not implement genuine inflation targeting, he said, but added that the bank will continue studying such a policy. Hayami ruled out the prospect of guiding the yen lower as a means of achieving renewed economic growth.
"If the yen's weakness develops rapidly, it will cause problems for countries in Asia and, given such an analysis, it is almost certain that this policy would create strong side-effects," Hayami said. "Therefore, I do not think there is any need for further weakening of the yen."
Hayami said the BoJ, under its new policy approach, will not hesitate if necessary to push additional funds into the short-term money market, even after the overnight call rate falls to zero. "Under the previous zero call-rate policy, we could not extend new funds after the overnight call rate reached zero, but under the new policy, we can do more," he said.
However, Hayami added that he cannot say immediately whether the bank plans to increase targeted bank reserves further, noting only that the BoJ will manage monetary policy on a "flexible and timely" basis subject to developments in the global economy and financial markets. The BoJ can buy extra bonds of up to 10-11 trln yen, he said, but added that "this does not mean that we will exhaust all of this."
Hayami said the government's representative did not present any policy proposals at today's monetary policy meeting, adding: "We did not take today's policy step due to pressure from the government or with the FOMC in mind."
Earlier, Cabinet Office State Vice Minister Takanori Sakai told AFX News that he would call on the Bank of Japan to return to the zero call-rate policy and adopt an inflation target at today's monetary policy board meeting.
Sakai attended the board meeting as a representative of the government.