Bank of Japan Modifies Monetary Policy Framework To Target Bond-Rate

The Bank of Japan announced its new monetary policy framework on Wednesday after years of stimulation failed to bring about steady inflation.

The central bank said it would keep its deposit rate unchanged at negative 0.1 percent while it wants to keep the yield on 10-year Japanese government bonds at zero by adjust the volume of its asset purchases.

The BOJ has been struggling for a long time to generate growth and inflation. The central bank introduced more aggressive stimulation early this year to lower down borrowing cost to negative. It wanted to push inflation to 2 percent this year, but the plan seemed not working.

The BOJ said it would maintain its program of buying long-term Japanese government bonds so that the balance of its holdings increases by 80 trillion yen ($781 billion) annually.

“The BOJ’s decision to steepen the yield curve showed they are taking into account the situation of financial institutions,” said Takeshi Minami, chief economist at Norinchukin Research Institute.

The Nikkei 225 rose 315.47 points, or 1.91 percent, to 16,807.62, up from a modest level of 0.3 percent gain before the decision. The Topix index rose 35.70 points, or 2.71 percent, to 1,352.67.

Japanese government bond yields briefly rose following the decision. The 10-year JGB yield climbed to as high as positive 0.005 percent and then retreated to negative 0.025 percent.

This is the first time in BOJ’s history that it sets the long-term-rate target. Some analysts show concerns that the government-bond market can’t be fully controlled by an official entity as BOJ may run out of bonds to buy.

“I can’t help myself becoming skeptical …whether they can control long-term interest rates, which move on a variety of factors,” said Mari Iwashita, chief market economist at SMBC Nikko Friend Securities.

Investors now are waiting for the Fed’s decision to see whether it will increase interest rate today.

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