A woman walks across an intersection near monitors showing Japan s Nikkei 225 index and a foreign exchange rate of the Japanese yen against the U.S. dollar in Tokyo, Thursday, July 27, 2023. AP
After a closely-watched meeting, the Bank of Japan (BoJ) said it would allow "greater flexibility" in government bond markets, having allowed them to move in a tight band in a process known as yields curve control.
But on Friday it said that while it would maintain that range, its upper and lower limits would be used as references, rather than being rigid.
The move means rates in Japan would be allowed to rise more than previously. The yen swung after the announcement.
The currency has been hammered for more than a year as the BoJ refused to shift from its loose policy, even as central banks around the world pushed up interest rates to fight surging inflation.
However, with prices picking up at home and the yen struggling, pressure has been growing on the bank to change tack.
The Nikkei 225 index sank more than two percent on the prospect of higher borrowing costs before paring the losses by the close.
"The BoJ's decision to tweak their yield curve control was broadly in line with what the market had anticipated, but probably not as hawkish as previously feared," said Khoon Goh, of Australia and New Zealand Banking Group.
"Market reaction has been very choppy as it is not a straightforward decision to digest."
Traders had been on edge ahead of the announcement owing to fears that tighter monetary policy would see Japanese investors -- the biggest foreign owners of US Treasuries with vast holdings of other global assets -- move their cash back home owing to better returns.
Stock markets have enjoyed a broadly positive week on hopes the Federal Reserve and other central banks were at or close to the end of more than a year of monetary tightening as inflation comes down.
The Fed on Wednesday said that future rate decisions would be determined by data, which was welcomed by investors who saw recent indicators -- pointing to an easing of price pressure and softening of the labour market -- as giving it room to hold off more increases.
And on Thursday, European Central Bank boss Christine Lagarde left open the possibility of a pause.
However, news that US growth beat expectations in the second quarter as jobless claims slipped revived the possibility that there was still more work to do.
After a negative session for Wall Street Thursday, Asian and European stock markets closed out the week mixed.
Hong Kong and Shanghai were boosted by hopes for further measures by Beijing to boost the struggling Chinese economy, and Singapore, Seoul and Taipei were also up.
Paris dipped even as data showed the French economy grew a forecast-busting 0.5 percent in the second quarter, while inflation eased in July.
London rose but Frankfurt dropped as data showed the German economy stagnated in the second quarter.
The week has been dominated also by earnings updates from some of the world's biggest companies.
ExxonMobil on Friday reported a big drop in second-quarter profits, citing lower refining margins and natural gas prices compared with the year-ago period in the aftermath of Russia's invasion of Ukraine.