The Bank of Japan ramped up its aggressive stimulus campaign on Friday, adding negative interest rates on central banks deposits to its massive asset-buying programme, stunning financial markets that expected no action or a moderate increase in asset purchases.
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The central bank said the move was aimed at forestalling the risk of global financial turbulence hurting business confidence and reviving the "deflationary mindset" it is striving to wipe out with aggressive money printing.
Asian shares jumped and the yen fell across the board and sovereign bonds rallied after the BOJ said it would charge for excess reserves parked with the institution, an aggressive policy pioneered by the European Central Bank.
The BOJ maintained its pledge to expand base money at an annual pace of 80 trillion yen ($675 billion) via aggressive purchases of government bonds and risky assets conducted under its quantitative and qualitative easing (QQE) programme.
But in a narrow 5-4 vote, it also decided to charge a 0.1 percent interest to current accounts that financial institutions hold with the central bank.
"The BOJ will cut the interest rate further into negative territory if judged as necessary," the bank said in a statement announcing the decision.
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Markets have been split on whether the central bank may ease policy as slumping oil costs and soft consumer spending have ground inflation to a halt, knocking price growth further away from the BOJ's ambitious 2 percent target.
In a quarterly review of its forecasts released on Friday, the BOJ cut its core consumer inflation forecast for the coming fiscal year beginning in April to 0.8 percent from 1.4 percent projected three months ago.
However, it expects consumer inflation to accelerate to 1.8 percent in the fiscal year ending in March 2018, taking into account the effect of Friday's measures.
The decision came in the wake of data that showed household spending and output slumped in December, underscoring the fragile nature of Japan's recovery.
Consumer inflation was just 0.1 percent in the year to December, invigorating expectations that the BOJ would eventually have to deliver further stimulus.
Many BOJ policymakers have been wary of using their diminishing policy tools to counter what they see as factors beyond their control, such as volatile financial markets and China's economic slowdown.
But pessimists on the BOJ board have worried that slumping Tokyo stocks may discourage firms from boosting capital expenditure, threatening the positive momentum the BOJ is trying to create with its heavy money printing. ($1 = 118.5500 yen)
(Reporting by Leika Kihara; Editing by Eric Meijer)