BOJ overhauls policy framework, sets yield curve target

By Leika Kihara and Stanley White

TOKYO (Reuters) - The Bank of Japan added a long-term interest rate target to its massive asset-buying programme on Wednesday, overhauling its policy framework and recommitting to reaching its 2 percent inflation target as quickly as possible.

The central bank also said it will allow inflation to overshoot its target by maintaining an ultra-loose policy - beefing up its previous commitment to keep policy easy until the target was reached and kept in a stable manner.

At the two-day rate review that ended on Wednesday, the BOJ maintained the 0.1 percent negative interest rate it applies to some of the excess reserves that financial institutions park with the central bank.

But it abandoned its base money target and instead adopted "yield curve control" under which it will buy long-term government bonds to keep 10-year bond yields at current levels around zero percent.

The BOJ said it would continue to buy long-term government bonds at a pace that ensures its holdings increase by 80 trillion yen ($781 billion) per year.

BOJ Governor Haruhiko Kuroda will hold a news conference to explain the decision at 3:30 pm Tokyo time. (0630 GMT).

Under the new framework that adds yield curve control to its current quantitative and qualitative easing (QQE), the BOJ will deepen negative rates, lower the long-term rate target, or expand base money if it were to ease again, the central bank said in a statement announcing the policy decision.

"The BOJ will seek to lower real interest rates by controlling short-term and long-term interest rates, which would be placed as the core of the new policy framework," it said.

Under QQE, the BOJ has been increasing base money - or the amount of money it prints - at an annual pace of 80 trillion yen ($783 billion). But analysts have said the BOJ will struggle to buy enough bonds in coming years with its huge purchases draining liquidity.

It decided in January to add negative rates to QQE.

($1 = 102.4100 yen)

(Additional reporting by Tetsushi Kajimoto and Minami Funakoshi; Editing by Chris Gallagher, Chang-Ran Kim and Eric Meijer)