The Bank of Japan shocked markets Friday after it unveiled plans to effectively charge lenders to park their cash with it, ramping up its long-running battle to kickstart the world's number three economy.
The unprecedented decision to adopt a policy of below-zero interest rates is the BoJ's latest weapon as it looks to spur lending and soon afterwards the Nikkei stock index soared almost three percent and the yen plunged.
But analysts said the announcement could be construed by some as a desperate move after three years of Prime Minister Shinzo Abe's big-spending, easing money policy, dubbed "Abenomics".
And in a stark acknowledgement of the huge job they have in ending a years-long fight to reinvigorate the economy, bank policymakers cut their inflation forecasts and pushed back the timeline for reaching their inflation goal.
It also warned over the negative impact of the economic crisis gripping key trading partner China -- a crucial driver of global growth -- and said it was prepared to cut rates further below the new -0.1 percent level "as necessary".
Friday's announcement is the latest throw of the dice by authorities as Abenomics has struggled to gain traction since its 2013 launch.
"It was a surprise to most market players who thought negative interest rates would be a last resort," said Koichi Fujishiro, senior economist at Dai-ichi Life Research Institute.
The rate change passed by a narrow vote among BoJ policy members, who kept their 80 trillion yen ($673 billion) annual asset-buying plan unchanged.
- 'Bitter divide' -
"Concerns had been mounting that the BoJ were increasingly tapped out in their ability to ease monetary policy any further, and today’s 5-4 decision shows how bitter the divide between hawks and doves is," said Angus Nicholson, a market analyst at IG Ltd. in Melbourne.
BoJ chief Haruhiko Kuroda, who is due to speak to reporters later Friday, is keeping a close eye on wage rises in spring negotiations.
Policymakers hope that putting more cash in shoppers' wallets will spur spending and move Japan closer to the bank's inflation target.
Governor Kuroda has gained notoriety by changing course when it is least expected, and today’s move will only serve to cement this reputation," Marcel Thieliant from research house Capital Economics said in a commentary.
Data earlier Friday painted a worrying picture of Japan's economic malaise, with inflation at a well-below-target 0.5 percent last year.
Also, spending by households in December fell 4.4 percent from a year ago and monthly industrial production contracted 1.4 percent.
The economy grew a stronger-than-expected 0.3 percent in July-September, after initial estimates had shown a contraction. Fourth-quarter data is due next month.
But a lacklustre global economy, marked by the slowdown in China and weakness in emerging markets, is posing challenges to the recovery.
The BoJ on Friday warned over the decline in crude oil prices and uncertainty about "future developments in emerging and commodity-exporting economies, particularly the Chinese economy".
Last month, bank policymakers rolled out a series of changes, including boosting their holdings in firms dedicated to capital spending and new hiring.
They also made some other tweaks to their massive bond-buying programme, considered the cornerstone of Abenomics.
However, they did not expand the size of the scheme and speculation has been building that they will have to do so in order to light a fire under the economy.
A falling price spiral in Japan for years put consumers off buying in the hope of getting goods cheaper down the road, denting firms' expansion and hiring plans. That weighed on growth in the wider economy.