The US central bank, which will deliver its latest policy decision at 7pm BST, is widely expected to keep interest rates unchanged at least until December.
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The decision to replace its target for the monetary base with a target for the 10-year government bond yields leaves the door open for a scaling back of JGB purchases in coming months, Marcel Thieliant, an economist at Capital Economics, said.
Japanese government bond yields rose briefly after the announcement, with the 10-year bond’s bid yield turning positive to 0.002%, before falling again to 0.025%.
“If monetary policy has effectively reached its limits, which appears to be the case, greater emphasis will now have to be placed on fiscal policy and structural reform to raise inflation and trend growth”, ANZ Bank economists Tom Kenny and Brian Martin said in a note to investors about the situation in Japan.
On Wednesday morning, the BoJ unexpectedly decided by a 7-2 majority to switch to what it called “Quantitative and Qualitative Monetary Easing (QQE) with yield curve control” from “QQE with a negative interest rate”. The second is “inflation-overshooting commitment” which aims to expand the monetary base until the year-on-year rate of increase in inflation measured by consumer price index (CPI) exceeds the price stability target of 2%, and stays above this target rate on a consistent basis.
The announcement was made after BOJ policy makers reviewed the effects of its current measures introduced since Governor Kuroda took office in March 2013, which failed to attain the 2 percent inflation goal in a planned two-year time frame. The Hang Seng of Hong Kong gained 0.6 percent to 23,669.90 and the Shanghai Composite index added 0.1 percent to 3,025.87.
The BOJ also scrapped a target for the average maturity of its government bond holdings.
Earlier, Japanese stocks rallied, with the Nikkei and the Topix indexes rising 1.9% and 2.7%, respectively, after the BoJ said 2.7 trillion yen ($26.60 billion) of its exchange traded fund purchases would be linked to the bank-heavy Topix index. Investors also awaited the US Federal Reserve’s decision on interest rates, which were expected to be left unchanged.
Volatility was especially acute in currency markets with the yen weakening by as much as 1.2% against the dollar in choppy trade. Members said near-term risk to the economic outlook remains roughly balanced. [Otherwise] the BoJ could have eased today, including the rate cut.
In December 2015, the USA central bank raised rates for the first time since 2006.
The RBNZ’s blunt statement that further easing would be needed knocked the local dollar down half a US cent to $0.7340, but the market has found it hard to sell a currency that still offers an overnight interest rate of 2 percent.
In London, the FTSE 100 was trading 0.5% up while sterling remained near 31-year lows against the dollar ahead of the Fed’s rate commentary.
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This was seen as move to more directly support the stock market and asset prices.
