By Leika Kihara and Tetsushi Kajimoto
TOKYO (Reuters) – The Bank of Japan on Friday widened the band at which it allows long-term interest rates to move around its target, as part of a raft of measures to make its ultra-easy policy more sustainable amid a prolonged battle to fire up inflation.
Following its two-day policy meeting, the central bank also removed its explicit guidance to buy exchange-traded funds (ETF) at an annual pace of roughly 6 trillion yen, which gives it more room to wind back its market stimulus.
Instead of buying at a set pace, the BOJ said it would buy ETFs only when necessary while maintaining a 12-trillion-yen ceiling for annual purchases.
As widely expected, the BOJ kept intact its target of -0.1% for short-term rates and 0% for the 10-year bond yield under its yield curve control (YCC) policy.
In a review of its policy tools announced on Friday, the BOJ said it would allow long-term rates to move up and down by 0.25% around its target, instead of by 0.2%.
In December, the BOJ unveiled a plan to conduct a review of its tools in March to make them more “sustainable and effective” as the COVID-19 pandemic prolongs its battle to spur growth and inflation with massive monetary support.
BOJ officials have dropped hints the central bank will allow long-term rates to fluctuate more around its 0% target to breathe life back to a market made dormant by its dominance.
They have also signalled a readiness to make the BOJ’s ETF buying more flexible so it can slow purchases significantly when stock markets are booming.
The BOJ has already been “stealth” tapering risky asset purchases by sharply reducing buying after ramping it up last year to calm markets jolted by the pandemic.
The challenge for the BOJ would be to convince markets that by making its policy framework sustainable, it can eventually push up inflation to its elusive 2% target.
Japan’s core consumer prices fell 0.4% in February from a year earlier, data showed on Friday, dropping at a slower pace than in January but remaining distant from the BOJ’s goal.
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