The Bank of Japan shifted the focus of its monetary stimulusWednesday from expanding the money supply to controlling interestrates, which some economists deemed as further evidence that BOJpolicy had reached the limits of its effectiveness.

The centralbank said it would adjust the volume of its assetpurchases, the core of its framework until now, as necessary in theshort term to control bond yields, while keeping it at about 80trillion yen ($780 billion) annually over the long term. The BOJalso scrapped a target for the average maturity of its holdings ofgovernment bonds.

The changes will help the BOJ manage the impact of its purchasesand negative interest rates on Japanese banks, whose profits havebeen squeezed by a narrowing of short-term and long-term yields.Governor Haruhiko Kuroda and the policy board kept that negativerate, imposed on a share of bank reserves, unchanged at minus0.1%.

Yuichi Kodama, chief economist at Meiji Yasuda Life InsuranceCo. in Tokyo, saw the shift as a tacit admission by the BOJ that ithas reached the limits of its JGBs purchases. The BOJ now ownsmore than a third of outstanding JGBs, with the pace of its buyingdraining the market of supply.

“If it takes additional easing in the future, it will probablydeepen the negative rate,” he said.

Kuroda said the BOJ hadn't reached the limits of its bondpurchases, and that the new measures strengthened the previousframework instead of scrapping it. An excessive flattening of theyield curve could harm the economy, he said during a newsconference.

“As for the amount of government bond purchases, it couldincrease or decrease, as it relates to the economy, prices and inparticular the financial markets,” he said.

The yen weakened against the U.S dollar before reversing totrade at 101.76 as of 6:26 p.m. in Tokyo. Japanese shares rose themost since July, with the Topix index 2.7 percent higher at theclose.

Japan's 10-year government bond yields hit positive territoryfor the first time since March. The 10-year JGB yield was at minus0.035% on Wednesday in Tokyo, after climbing to as high as 0.005%,from minus 0.065% Tuesday, according to Japan Bond Trading Co.

Easing Rate Impact

The BOJ faced a backlash after first deploying negative rates inJanuary. Bank shares tumbled at the time, the yen gained strengthand household sentiment worsened.

Kuroda recently acknowledged that negative rates had cut intofinancial institutions' profits by driving long-term yields lower,while pointing out that borrowing costs for businesses andconsumers had also fallen. He also expressed concern about expecteddeclines in returns on insurance and pension products, and theimpact this could have on people's confidence.

“The BOJ's decision to steepen the yield curve showed they aretaking into account the situation of financial institutions,” saidTakeshi Minami, chief economist at Norinchukin ResearchInstitute.

Shares in Japanese banks surged as investors bet that the BOJ'snew framework would be less likely to erode commercial banks'profits. The 87-stock Topix Banks Index surged 7%, the most sinceJuly 29, after the policy announcement. Mitsubishi UFJ FinancialGroup Inc., the nation's largest lender, jumped 7.4%.

The BOJ has been the most daring of global central banks inusing monetary stimulus to confront deflationary pressures andstagnation, but Kuroda recently began to publicly weigh the costsof its extraordinary easing against the benefits, a shift from his“whatever-it-takes” approach of the past three-plus years.

The decisions announced Wednesday followed a comprehensivereview of its policies to assess their effectiveness and determinehow to reach its distant 2% inflation target. They signal thatthe BOJ has taken a longer-term view of “reflating” Japan'seconomy, and is focused for now on tweaking its policy frameworkwith sustainability in mind.

The BOJ strengthened its forward guidance by pledging tocontinue expanding the monetary base until inflation is stableabove the 2% target — committing to an overshoot of consumer-pricegains in an effort to revive inflation expectations.

Fed Meeting

The BOJ may yet decide to expand JGB purchases or cut thenegative rate further as soon as its next meeting ending on Nov. 1.Some economists suggested it should wait until after the FederalReserve's rate decision later Wednesday before acting. A Fed ratehike, though deemed unlikely this month, would probably help theBOJ's cause by weakening the yen versus the dollar.

Inflation indicators and expectations have sagged. Japan's coreconsumer prices fell in July at the fastest pace since Kuroda tookthe helm of the BOJ in March 2013. Market participants this yearhave shrugged off Kuroda's repeated vows that he would act whenevernecessary, helping drive the yen to long-term highs. It has gainedabout 18% this year.

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