Bank of Japan overhauls policy framework with a focus on yield curve

Machinery makers lead US stocks higher in early trading

“With a view to achieving the price stability target of 2 percent at the earliest possible time, the Bank made a decision to introduce “QQE with yield curve control”,” the bank said in a statement on Wednesday. The yield curve control specifies that the BOJ will control both short-term and long-term interest rates.

Australian shares rose for a second straight session on Wednesday, spurred by the Bank of Japan’s decision to adopt a target for long-term interest rates in an overhaul of its massive monetary stimulus programme.

Instead, the Bank of Japan said it would keep the interest rate at 0.1%, but would also expand its monetary base until inflation is stabilised above 2%. 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. It can’t keep up the current pace of bond-buying much longer: after three and a half years of massive purchases, Deutsche Bank says the central bank already holds almost 40 percent of Japan’s outstanding government debt.

The STOXX 600 index rose 0.8 percent, touching its highest level in 2 weeks after a rise in European banks.

Japan’s central bank kept rates steady at its meeting Wednesday but issued a plethora of fresh changes to its policy approach, indicating its comprehensive review of its negative interest rate policy and asset purchases was fruitful.

The move had an immediate impact with Japanese 10-year bonds rising above zero for the first time in six months, while major Japanese banks’ shares surged with Mitsubishi and Sumitomo Mitsui up around 6 per cent. By pushing yields on long-term government bonds higher, the central bank is expanding investment options for institutional investors such as life insurance companies.

The yen weakened against the United States dollar and traded at 102.54 at 1.39pm. The bank wants to push the real rate down deeply into negative territory as a spur to economic activity.

The Treasury yield curve reversed its steepening move before the Federal Open Market Committee’s policy statement and Chair Janet Yellen’s press conference.

Kuroda said directly targeting interest rates could work more effectively to raise inflation expectations than focusing on base money.

Japan’s currency has outperformed its developed-market peers this year, surging 18 per cent against the greenback through Tuesday, amid doubts that the BOJ had adequate tools left to revive the economy and raise inflation to 2 per cent.

Although the USA central bank is not expected to raise rates at 7pm tonight, investors will comb the accompanying statement and press conference for any clues about whether it will hike in coming months.

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