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TOKYO, Mar 9 (AFP): The Bank of Japan announced Thursday an end to its five-year-old, ultra-loose monetary policy in a first step towards raising interest rates as the economy snaps out of its deflationary doldrums.
The central bank will aim to keep short-term interest rates at effectively zero per cent and inflation below 2.0 per cent as it returns to a conventional monetary policy of focusing on lending costs.
The Bank of Japan signalled it was in no rush to start jacking up borrowing costs, saying that as long as inflation remained subdued "very low interest rates will probably be maintained for some time."
For almost five years the Bank of Japan has been flooding the financial market with virtually free money, a policy known as "quantitative easing", in an unprecedented measure to try to curb deflation.
The central bank said it did not expect any significant disruption to financial markets from the end of this policy.
"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," it said in a statement.
It said there would now be a period in which short-term official interest rates are held at almost zero per cent, followed by a "gradual adjustment in the light of developments in economic activity and prices."
The Japanese currency fell back on news of the widely expected policy shift. Dealers said the move was a typical 'buy the rumour, sell the fact' reaction.
The stock market welcomed the end of uncertainty over monetary policy, closing up 2.62 per cent at 16.036,91 points.
The Bank of Japan had been under pressure from the government not to act too hastily over fears a move could put the brakes on the economic recovery.
But analysts said this might have actually made the central bank even more determined to press ahead with a policy change this week for fear of losing its credibility with markets.
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