BOJ tweaks policy, but keeps minus interest rate unchanged

Tokyo: Japan's central bank opted Wednesday to keep its monetary easing strategy mostly as is, while tweaking its asset purchases to push yields on long-term government bonds higher.

The technical adjustments to the Bank of Japan's policies were widely expected, though many analysts had expected an interest rate cut or other more aggressive moves to perk up sluggish growth in the world's No. 3 economy.

The meeting wrapped up just hours before the U.S. Federal Reserve's latest policy decision was due. Economists expect the Fed to leave rates unchanged when it ends its two-day meeting Wednesday.

The Bank of Japan's policy statement said its short-term policy rate will remain at negative 0.1 per cent. The central bank is charging that rate on excess reserves it holds for banks to encourage them to lend more and said it might cut it further.

The tinkering with policy highlights the limits of the central bank's options but may alleviate concern the BOJ is "crowding out" other investors with its massive purchases of government bonds.

Pushing yields on longer-term securities higher will be a boon to life insurers and other big institutional investors that have seen investment returns plunge after the BOJ imposed its negative interest rate policy in February.

In reaction to the BOJ decision the benchmark Nikkei 225 index jumped 1.9 per cent Wednesday, to 16,807.62.

The central bank said it will continue its asset purchases at a rate of about 80 trillion yen ($787 billion) a year.

The "new framework" to strengthen monetary easing also commits the Bank of Japan to pushing past the 2 per cent inflation target it set more than three years ago.

In a 61-page assessment, the BOJ said its "quantitative and qualitative easing," monetary policy, known as QQE, had succeeded in ending deflation, or falling prices. But it said that fostering the scale of "inflation expectations" that might encourage consumers and businesses to spend more was taking time.

"With regard to the outlook, sluggishness is expected to remain in exports and production for some time, and the pace of economic recovery is likely to remain slow," it said.

Analysts expect the BOJ to eventually slash its policy rate further.

"With underlying inflation set to fall to zero in coming months, we expect the policy rate to eventually fall to minus 0.4 per cent," Marcel Thieliant of Capital Economics said in a commentary.

The world's other major central banks have spent years struggling to rejuvenate their economies, to raise inflation and get businesses and consumers to spend more.

In the United States, the Federal Reserve is expected to raise short-term U.S. interest rates - but probably not before a meeting in December.

In December 2015, the U.S. central bank raised rates for the first time since 2006. It was widely expected to hike rates several more times this year, has held off as the U.S. economy sputtered, hobbled by weak global growth and a strong dollar that makes American goods pricier in foreign markets.

Meanwhile, European Central Bank chief Mario Draghi is asking for help from the governments of the 19 counties that use the euro currency. The ECB on September 8 left its aggressive stimulus measures unchanged. It called on European governments to spend more on infrastructure projects and to enact reforms to make their economies more efficient and business-friendly.