The Bank of Japan on Friday said it would trim its vast hoard of government bonds as it cautiously steps away from its long-running ultra-loose monetary policy.
The central bank kept interest rates unchanged after a two-day meeting but announced plans to "reduce its purchase amount of JGBs (Japanese Government Bonds) thereafter to ensure that long-term interest rates would be formed more freely".
"A detailed plan" for the reduction "during the next one to two years or so" will be decided at the next policy meeting in July, it said.
While the move had been widely expected, observers said the decision to defer action until next month weighed on the yen, pushing it towards 158 per dollar, from around 157.20.
However, news that borrowing costs would not go up for now lifted the benchmark Nikkei index 0.7 percent in the afternoon, having been flat at the break.
The BoJ raised rates in March for the first time since 2007 as it seeks to normalise policy without destabilising the world's fourth-largest economy.
Friday's move marks another step away from more than two decades of quantitative easing designed to banish stagnation and harmful deflation.
Each month, the BoJ targets monthly government bond purchases of around six trillion yen ($38 billion), to pump liquidity into the system and keep borrowing costs down.
The scale of the BoJ's total assets is enormous -- larger than the country's gross domestic product -- and the bank holds more than half the value of all JGBs in circulation.
Cutting back on bonds has been on the cards for months.
Policymaker opinion cited in the minutes of the BoJ's April meeting said the bank should indicate an intention to do so because it "needs to reduce the size of its balance sheet".
Other central banks have aggressively hiked interest rates to tackle soaring inflation in recent years.
But the BoJ has largely stuck to its easy-money policies -- culminating in the Japanese currency hitting a 34-year low in April that led authorities to step into forex markets.
"Reducing bond purchases is an important aspect for the Bank of Japan as it aims to normalise its monetary policy and support the yen," Wael Makarem, financial markets strategists lead at Exness, told AFP before the decision.
"However, given Japan's fragile economic recovery and high public debt, the central bank may have to proceed cautiously," he said.
The BoJ wants to see demand-driven inflation of two percent, fuelled by wage increases.
Japanese inflation has been above the target since April 2022, but analysts question to what extent this is caused by temporary factors such as the war in Ukraine.
On Friday, the bank said factors including accommodative financial conditions were behind the gradual intensification of "a virtuous cycle from income to spending".
But "there remain high uncertainties surrounding Japan's economic activity and prices", it said.
As well as calling time on its outlier negative-rate policy in March, the bank has stepped away from other unorthodox policies including its yield curve control program, which allowed bonds to move in a tight band.
"With inflation remaining somewhat sticky... a further rate hike in July or September is likely" although "the timetable for that may remain unclear", said Katsutoshi Inadome, senior strategist at SuMi TRUST.