At a two-day rate review that ended on Tuesday, the Bank of Japan kept its interest rate targets steady but for the first time adopted a forward guidance on future policy, saying it will keep rates "very low" for an "extended period of time."

As its huge purchases dry up market liquidity and efforts to cap bond yields face difficulty, the central bank also said it would allow yields to rise more naturally and could slow asset buying if market conditions allowed.

Its governor, Haruhiko Kuroda, said the changes in its framework were partly to stamp out speculation that the central bank was about to exit its super loose monetary policy or raise rates.

The decision highlights the dearth of ammunition the BOJ has left to fire up stubbornly weak inflation, even as other major central banks emerge from crisis-mode policies and stock up policy tools to fight another recession.

Kuroda said the central bank will now tolerate 10-year bond yield rises of up to around 0.20%, up from around 0.10% previously, as keeping yields in too narrow a band would shrink bond trading.

He also said the BOJ's annual purchases of risky assets could fluctuate, signalling that buying of exchange-traded funds may fall below its pledge to buy roughly 6 trillion JPY per year.

"We took steps so we can continue our powerful monetary easing longer, because it is taking more time than expected to achieve our price target. I think that with these steps, we can continue with our massive stimulus programme," Kuroda said.

The yen weakened against the dollar and government bond yields fell, as markets took the BOJ's moves as reaffirming its commitment to keep monetary policy ultra-loose.

In the days leading up to the meeting, speculation that the BOJ could raise the prospect of an interest rate hike had unsettled financial markets and pushed global bond yields higher.

In a quarterly review of its projections also released on Tuesday, the BOJ trimmed its price forecasts and conceded inflation could fall short of its target for three more years.

The BOJ had been forced to repeatedly step into the market to cap 10-year yields around 0.11%, cementing investors' perception that was the bank's line in the sand.

Its huge asset purchases have also drawn criticism, even from some BOJ policymakers, as distorting markets.

The challenge for the BOJ was to create some space to allow for future adjustments to what was becoming an unsustainable stimulus programme, without causing an unwelcome yen spike by fuelling speculation of an early exit.

Its policy moves on Tuesday to some extent make this possible by adding forward guidance communication in its regular policy statements that pledges to keep rates low, taking into account uncertainties on the economy including the effect of a scheduled sales tax hike next October.

In the past, the BOJ gave no guidance on the future path of its interest rates, leaving markets to their own interpretations.

"There was some speculation in the market that the BOJ will seek an early exit from stimulus, or raise rates soon. With this guidance, we can dispel such speculation," Kuroda said. is an independent macroeconomic consultancy with thousands of subscribers all over the world. We provide fundamental research to help our clients make better investing decisions. Our subscribers should expect to get access to:

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