The Bank of Japan (BOJ) kept its short-term interest rate target unchanged at -0.1% on Friday but also took steps to make its yield curve control policy more flexible.
The central bank maintained guidance allowing the 10-year yield to move 0.5% around the 0% target, but said those would now be "references" rather than "rigid limits", Reuters reported.
The BOJ raised the upper limit for the fixed rate operations and said it will offer to buy 10-year Japanese government bonds (JGB) at 1.0% in fixed-rate operations, instead of the previous rate of 0.5%.
The move lifted Japan's benchmark bond yield to a nine-year high. The 10-year JGB yield spiked to 0.575% for the first time since September 2014.
The yen also extended gains against the US dollar and was up as much as 1.05% at 138.05.
Japanese markets declined, with the Nikkei falling over 2% to around 32,275.
However, the Tokyo Stock Exchange's banking index rose on the prospect of a steeper yield curve, which would revive profit from lending. The index gained as much as 4.6% to reach an eight-year high and was last up 4.2%, Reuters reported.
Amid growing concerns over the rising side-effects of prolonged monetary easing, the BOJ has been under pressure from investors to allow yields to rise all year, with wages and inflation rising.
Data showed core consumer inflation in Japan's capital slowed in July but remained well above the central bank’s 2% target.
Meanwhile, earlier this week, the US Federal Reserve raised its benchmark lending rate by 25 basis points (bps) to a target range between 5.25% and 5.5%, its highest level since 2001.
The European Central Bank (ECB) also, on Thursday, raised interest rates by 25 bps to its highest level since 2001 to 3.75%.
(With inputs from Reuters)
