Bank of Japan policymakers were cautious not to indicate the central bank's first interest rate hike in 17 years signaled the beginning of a monetary tightening cycle, while underscoring the need to guide policy as appropriate, minutes of the March meeting showed Thursday.
At the March 18-19 meeting, BOJ board members expressed confidence that its 2 percent inflation target is attainable, with some pointing to the risk of higher inflation and the need to respond flexibly by possibly further raising interest rates.
The Policy Board decided to use short-term interest rates as its major policy tool, guiding them in a range of zero to 0.1 percent at the meeting. It also scrapped its program to keep borrowing costs extremely low, though it vowed to continue buying government bonds to prevent a spike in yields.
Despite the major policy change, the BOJ signaled it is in no rush to raise interest rates further, given that underlying inflation, which excludes one-off factors, remains below 2 percent. That stance, contrasting sharply with other major central banks, weakened the yen against the dollar and the euro.
"Members shared the recognition that, given the current outlook for economic activity and prices, it was anticipated that accommodative financial conditions would be maintained for the time being," the minutes said.
Some members pointed out that "medium- to long-term inflation expectations in Japan were in the process of rising toward 2 percent, and therefore the changes in the monetary policy framework would not be a shift to a phase of monetary tightening, which was the case in the United States and Europe."
Many members said long-term interest rates should be determined by market forces, with some calling for government bond purchases to be reduced "at some point in the future" and its holdings to be cut.
Some board members shared their belief that the BOJ's major policy overhaul would go smoothly without rattling financial markets, the minutes showed.
The BOJ's aggressive buying of assets like government bonds and exchange-traded funds expanded its balance sheet, making its policy normalization process a daunting task.
In its April policy meeting last week, the BOJ left monetary policy unchanged. The decision, coupled with its governor's comments suggesting that the central bank did not take issue with the rapid depreciation of the yen, sent the yen sharply lower against the dollar and apparently prompted the government to intervene in the market to slow the decline.
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