Japan's Central Bank Retains Key Interest Rate While Fine-Tuning Bond Purchases For More Flexibility

TOKYO (AP) -- Japan's central bank opted Friday to keep its benchmark interest rate at minus 0.1% but said it will fine-tune its bond purchases to allow greater flexibility given "high uncertainties" for the economy and for prices.

The Bank of Japan said it needed a more nimble approach to keep financial markets stable as it works toward a goal of keeping inflation near 2%.

It said it would offer to buy 10-year Japanese government bonds at 1% each business day, instead of the upper limit of 0.5% that was imposed under its "yield curve control program." After the BOJ's announcement, the yield on the 10-year government bond surged to 0.57%.

The aim of the ultra-lax monetary policy is still to keep long-term interest rates near zero percent, it said in a statement.

The BOJ's yield curve controls are part of a suite of central bank policies, including massive asset purchases, meant to keep credit cheap to try to spur investment and spending and prop up economic growth.

The central bank has faced pressure to adjust its policies as the Federal Reserve and other major central banks raised interest rates to slow lending and curb inflation. Japan's inflation rate has lagged behind those in the U.S. and Europe but is now over 3%.

The BOJ has resisted raising its minus 0.1% benchmark rate out of concern that growth in Japan, the world's third-largest economy, may slow given risks of recession in the U.S. and other major economies. A slump in China has added to those uncertainties.

Friday's decision followed a flurry of speculation over potential changes to policies the bank has kept in place for years.

"We still think that a slowdown in inflation will convince the bank to keep its short-term policy rate unchanged over the coming months," Capital Economics said in a research note. But it said given signs that prices are rising along with wages, "the risks of the Bank tightening policy in earnest are rising."

Friday's statement revised the central bank's estimate for economic growth in the current fiscal year, ending in March, to 1.3% from 1.4%. It raised the forecast for core inflation excluding food to 2.5% from an earlier 1.8%.

"With extremely high uncertainties surrounding economies and financial markets at home and abroad, the Bank will patiently continue with monetary easing while nimbly responding to developments in economic activity and prices as well as financial conditions," said the statement issued after the BOJ's policy meeting.

The gap between Japan's negative benchmark rate and rates in the U.S. has caused the Japanese yen to weaken against the U.S. dollar. That has amplified price pressures in Japan, raising costs for consumers and manufacturers given the country's heavy reliance on imports, for which prices have risen sharply since the pandemic.

Markets wobbled ahead of Friday's announcement. Afterward, shares fell in Tokyo and the Japanese yen weakened against the U.S. dollar.