TOKYO The Bank of Japan overhauled its monetary policy framework on Wednesday, switching to targeting interest rates and the shape of the government bond yield curve from its previous policy of targeting base money.
The following is a look at what is new and what has changed:
YIELD CURVE CONTROL
The new centerpiece of the BOJ's monetary policy is controlling the shape of the yield curve, which is formed by plotting yields on government debt with durations from one month out to 40 years.
The BOJ will use the negative 0.1 percent interest rate it charges on a small portion of commercial bank reserves to keep yields low at the short end of the curve.
The BOJ introduced a new target for 10-year government bond yields of around zero percent and will buy government bonds to prevent yields from rising too far above that target.
The BOJ says this is beneficial because it can focus on lowering yields that have the most immediate impact on the economy.
The new policy allows yields on 20-year, 30-year and 40-year debt to rise, which benefits banks and insurers who use a widening spread between short-term and long-yields to generate profits.
Commercial banks had become critical of the BOJ's monetary policy after a decline in long-term yields caused the curve to flatten so much that their profits started to shrink.
The BOJ did not specify how steep it wants the yield curve to be.
NEW MARKET OPERATION
To better control the yield curve, the BOJ introduced a new government debt buying operation. The BOJ will set purchase yields per auction as a spread over a benchmark rate the BOJ will determine later.
The BOJ will also be able to purchase a fixed or unlimited amount per auction.
The BOJ said its previous commitment to buy government debt at an 80 trillion yen annual rate remains intact, but the BOJ abandoned its target duration for purchases.
The BOJ could raise or lower the annual rate of purchases in the future depending on the shape of the yield curve, BOJ Governor Haruhiko Kuroda told reporters.
Some economists said Kuroda had effectively established an easy way to lower debt purchases in the future.
NEGATIVE INTEREST RATES
The BOJ kept its negative 0.1 percent interest rate, despite speculation from some economists that it would take it further into negative territory to ease policy at Wednesday's meeting.
FUTURE POLICY LEVERS
If the BOJ needs to ease policy in future, the first tools it will use are changes to the negative 0.1 percent interest rate and the target for 10-year government bond yields.
Changes to risk-asset purchases and the annual pace of government bond buying remain options, but Kuroda made it clear the priority had shifted to interest rates.
COMMITMENT TO ALLOW INFLATION TO OVERSHOOT
The BOJ introduced a new commitment to continue expanding the monetary base until core consumer prices rise above its 2 percent inflation target in a stable manner.
Its previous commitment was that it would continue with its stimulus program until inflation was expected to remain around 2 percent in a stable manner.
Kuroda said the commitment to overshooting the 2 percent target was intended to dispel speculation that the BOJ had given up on its price target.
However, this commitment may have little impact since many economists have long said 2 percent inflation was overly ambitious goal.
BASE MONEY TARGET
The BOJ abandoned its numerical target for base money, meaning it no longer targets an annual expansion of base money by 80 trillion yen.
This is a clear climb-down for Kuroda because expanding base money, or the amount of money the BOJ prints, was a central plank of the quantitative easing program he launched in 2013.
Kuroda told reporters on Wednesday there was no link between base money and inflation expectations in the short run, highlighting how far out of favor targeting the monetary base has fallen.
RISK ASSET PURCHASES
The BOJ left unchanged its annual purchases of exchange-traded funds (ETFs) and real estate investment trusts at 6 trillion yen and 90 billion yen, respectively.
The BOJ increased the ratio of ETFs linked to the TOPIX stock index, which is broader than the two other indexes to which the BOJ's ETF purchases were linked.
This move could help counter criticism that the BOJ's purchases were starting to distort the stock market or favor individual companies, some economists say.
(Reporting by Stanley White and Tetsushi Kajimoto; Editing by Will Waterman)