The Japanese central bank allowed the 10-year government bond yield, a key indicator for long-term interest rates, to increase above 1 percent, signaling a policy shift into an exit strategy after a decade-long quantitative easing program for stimulation.

The Bank of Japan held a monetary policy meeting on Tuesday and decided to keep the upper limit of long-term interest rate fluctuations at 1 percent but to tolerate a certain degree of exceeding it depending on market trends.

With the latest policy decision, the Japanese central bank has now made another adjustment to its yield curve control (YCC) policy, a key tool in monetary easing, in just three months since July.

The BOJ has been maintaining an easing stance by keeping short-term interest rates at negative 0.1 percent, with 10-year government bond yields at around 0 percent.

The central bank has been suppressing rising market interest rates through government bond purchases, known as fixed-price operations, when market rates rise above its tolerance for changes.

In the face of post-pandemic inflation and interest rate hikes worldwide, however, Japan increased the upper limit of the 10-year government bond yield from 0.25 percent in December to 0.5 percent in July.

Ahead of the monetary policy adjustment, the 10-year government bond yield reached 0.955 percent, the highest since May 2013, effectively approaching 1 percent.

The latest decision is seen as an attempt to avoid large-scale government bond purchases and a signal to the market that quantitative easing will come to an end.

Analysts attributed the policy change to Japan’s strong domestic economic growth and rising inflation.

The BOJ raised its gross domestic product (GDP) growth rate forecast to 2 percent from July’s 1.3 percent, citing increased household consumption, surge in foreign visitors, and more corporate activity.

Inflation caused by quantitative easing has also been a burden on the Japanese economy. The BOJ also revised its consumer price index (CPI) inflation rate forecast for this year to 2.8 percent from 2.5 percent in July.

By Lee Seung-hoon, Shin Yoon-jae and Chang Iou-chung

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