THE Bank of Japan (BOJ) on Wednesday announced the results of its eagerly awaited "comprehensive review" of policy - but rather than launch new easing initiatives, it appeared focused on rescuing Japanese financial institutions from the consequences of its unconventional monetary policies.
Its Policy Board signalled a shift from "monetary base control" to "control of interest rates" along the yield curve - a technical-sounding measure but one which, analysts said, has considerable significance for Japanese banks and other lenders who have complained that the central bank's policies have damaged their profitability.
Another key aspect of the Policy Board's decision was, in effect, to adopt a longer-term target for achieving its highly elusive 2 per cent annual inflation goal, and to allow inflation to "overshoot" on the upside in order to achieve the target over a longer period than originally planned.
Markets appeared rather underwhelmed by these moves, which contrasted sharply with the "shock tactics" unleashed by the BOJ in the last three years; these have included massive rounds of monetary easing via central bank asset purchases and the introduction of negative interest rates.
The yen eased slightly in Tokyo trading to around 102.5 to the dollar; Tokyo stock prices rose modestly, although bank and other financial stocks rose sharply, underlining the expected positive impact of the BOJ's new measures on earnings.
Under the quantitative and qualitative easing (QQE) assaults launched by the central bank since Haruhiko Kuroda became governor at the start of 2013, the BOJ has successfully pushed down interest rates in its efforts to spur inflation and provide incentives for consumption and investment rather than saving.
But the resultant flattening of the yield curve has damaged banks' abilities to profit from borrowing short (at low rates) and lending long (at higher rates). Senior bankers have hardly held back from complaining about this, and their views have appeared to gain political momentum.
Early this year, the BOJ tried to steepen the yield curve by introducing negative interest on short-term commercial bank deposits at the central bank.
Now, it is moving to control rates at the long-end as well, by varying its purchases of 10-year Japanese Government Bonds; by modifying the framework of its bond-buying programme, it aims to keep the yield on the bellwether 10-year Japanese government debt at around zero per cent.
To push down shorter-term interest rates, the BOJ has decided to leave its negative policy rate unchanged at -0.1 per cent, while promising to continue to expand the monetary base until consumer prices exceed 2 per cent in a stable manner.
The head of Japan markets research at JP Morgan Chase Bank in Tokyo, Tohru Sasaki, said, in comments made available to The Business Times: "Today's decision clearly suggests that the BOJ is seriously concerned about bank earnings, and that should be supportive for bank stocks."
He added that the decision seems to suggest that the main focus of the BOJ has shifted from the exchange rate to bank stocks.
"If the BOJ prefers to push the yen lower, they may have cut further to push the real interest rate lower, but this is not the case."
In a similar vein, Jesper Koll, chief executive officer at investment group Wisdom Tree, Japan, in Tokyo told BT: "This is a positive for Japan equities, banks and financial (houses) in particular; but, in my view, it is negative for the yen."
As reported in BT, chairman of the policy research council of the ruling Liberal Democratic Party, Toshimitsu Motegi, had called on Tuesday for the government to accelerate structural economic reform through measures to boost Japan's international competitiveness; his remarks implied reduced reliance on currency competitiveness.
The BOJ's Mr Kuroda, defending his policies, said after the Policy Board meeting: "It is true that more than three years have passed (since we deployed QQE). But there is absolutely no change to our commitment to achieve 2 per cent (inflation) at the earliest date possible.
"We have changed the policy target. But we have not abandoned our previous policies. We have simply strengthened them. With 'yield curve' control, we can achieve declines in real interest rates that are most desirable for the economy."
The BOJ governor insisted that the central bank will not, in the meantime, hesitate to adjust monetary policy with an eye on economic and price developments:
"We will ease further when necessary. We can cut short-term rates, lower the long-term rate target, buy more assets or if conditions warrant, accelerate the pace of expansion in monetary base."