The Bank of Japan ended its unprecedented five-year policy of flooding the financial system with huge amounts of cash amid signs the economy is beating deflation but the central bank assured the market it will keep short-term interest rates around zero for the time being.
Voting 7-1, the central bank's board agreed to scrap its ultra-easy monetary policy which had been in place from March 2001 to arrest price falls and spur economic growth.
The change includes, as expected, a shift from targeting money (bank reserves specifically) to targeting the overnight interest rate:
At the monetary policy meeting held today, the Bank of Japan decided to change the operating target of money market operations from the outstanding balance of current accounts at the bank to the uncollateralized call rate,' the central bank said in a statement.
For the time being, however, this may be more a change in the implementation of policy than a change in the policy itself:
To maintain short-term interest rates near zero, the BoJ said it will continue to keep the current account reserves above the required 6 trln yen over the next few months and will continue to buy 1.2 trln yen in government bonds each month. The bank currently requires financial institutions to park 30-35 trln yen in current account deposits with the BoJ.
The central bank said it does not expect the move to result in drastic changes.
'Given that the effects of the quantitative easing policy on economic activity and prices now mainly result from short-term interest rates being zero, there will be no abrupt change as a result of today's policy decision,' the BoJ said.
Significantly, the BoJ joined the ranks of central banks with an explicit inflation objective, though one that represents more a statement of preference than a constraint. From Reuters:
The BOJ set a 0-2 percent reference rate for consumer price inflation to improve the transparency of its policy making and leave flexibility. It is a non-binding price yardstick, unlike a hard inflation target that some influential politicians have called for.
The BOJ said most board members' idea of a stable prices centred around 1 percent.
For now, everyone seems happy.