Japan's central bank scrapped its super-loose monetary policy on Thursday, but in a nod to concerns about fallout for world markets and the domestic economy, said it would keep short-term interest rates around zero for now. The decision represents a first step toward an eventual interest rate rise in a country where rates have been virtually zero for years, and reflects the central bank's confidence that a seven-year battle against deflation has been won. With the U.S. Federal Reserve and the European Central Bank already raising rates, the shift by the BOJ also signals that an era of cheap money is ending worldwide, boosting the risk of volatility in global financial markets. Analysts had been divided over whether the BOJ could move this month or next, but political pressure to hold fire so as not to scupper a hard-won economic recovery may have strengthened the central bank's resolve. "Also remember, the Bank of Japan has to establish its credibility as an independent player in the financial markets and this was an opportunity they could not resist," said Arjuna Mahendran, chief economist at Credit Suisse Private Bank in Singapore. The "quantitative easing" policy, which involved flooding the banking system with excess funds, was adopted as an emergency measure in 2001 to prevent a credit crunch that had threatened to further damage an already shaky economy. The BOJ said it would no longer set a target for the amount of surplus funds in the money market, but instead adopt a more conventional tactic of guiding the unsecured overnight call rate, which has been pinned at around 0.001 percent for several years. Tokyo share prices extended earlier gains and the benchmark Nikkei average closed up 2.62 percent on relief that uncertainty was over. The yen fell to a two-week low against the dollar on the likelihood that interest rates would stay low. The central bank said it would gradually adjust the overnight call rate from zero percent but that if inflationary pressures were restrained, it would keep rates low for some time. The BOJ also joined a trend among central banks globally to telegraph their intentions to markets by adopting a "reference rate" of 0-2 percent for inflation. The reference rate is not a binding target but makes policy-making clearer while giving the central bank flexibility.