The Nikkei 225 reached its highest point for over a year and the yen fell against the dollar as the Bank of Japan (BoJ) confirmed that it would hold interest rates as widely expected.
The BoJ’s Policy Board maintained its stance of negative interest rates, keeping the rate at minus 0.1 per cent.
It also reiterated that policy would remain expansionary until inflation remains above two per cent “in a stable manner.”
"We are still distant from our 2 percent inflation target. It's therefore appropriate to continue with powerful monetary easing," said BoJ governor Haruhiko Kuroda, according to Reuters.
Japan’s economy has “continued its moderate recovery trend”, according to a relatively upbeat Policy Board announcement, with exports growing and an improving domestic demand picture.
The BoJ also continued its bond-buying policy to keep 10-year Japanese government bond yields near zero per cent, an effort to encourage investors to move money into the wider economy in search of yield.
The central bank has struggled to stimulate activity in the world’s third largest economy, with zero interest rates or lower since 2011. The last move was a cut from zero per cent to minus 0.1 per cent at the start of 2016.
Craig Erlam, senior market analyst at Oanda, said: “It’s been suggested that the BoJ may look to reduce its bond purchases, raise interest rates or simply increase the target yield on 10-year bonds in order to stop the currency depreciating too rapidly but with inflation still a million miles from target, Governor Haruhiko Kuroda intimated that none of these options are currently being considered.”
The BoJ’s target rate for inflation is two per cent, in line with other major central banks, but it has struggled to boost prices in the past two years.
Japan’s rate of inflation jumped in October to post its first positive measure – 0.1 per cent – since February. Deflation in the six months before October averaged above 0.4 per cent.
A strong yen had weighed on Japan’s economy, weakening exports and making imports cheap. However, the election of Donald Trump – and the subsequent boom in the value of the dollar to 13-year highs – has given the BoJ an unexpected boost.
The Nikkei 225 – which is exporter heavy – rose to 2016 highs of 19,511.20, before paring some of its gains.
Mihir Kapadia, chief executive of Sun Global Investments, said: “While the BoJ closed the year with an optimistic view of the economy, the yen still weakened. Many investors in Asia are holding on to a ‘wait-and-see’ market attitude due to the on-going geopolitical turbulence.”