The Bank of Japan on Friday introduced a negative interest policy in a move to boost a stumbling recovery in the world's third-largest economy.
The surprise move rattled stock market investors, who jumped in with a massive buying spree and then dumped shares, leaving the benchmark Nikkei 225 stock index nearly flat by early afternoon.
The Japanese yen slid, with the U.S. dollar rising to 120.40 yen from about 118.50 earlier in the day.
The central bank said it is imposing a 0.1 per cent fee on some commercial bank deposits with the BOJ, effectively a negative interest rate.
It hopes that will encourage commercial banks to lend more and stimulate investment and growth.
In its policy statement, the central bank said the economy "continued to recover moderately."
"Recently, however, global financial markets have been volatile against the backdrop of the further decline in crude oil prices and uncertainty over future developments in emerging and commodity-exporting economies, particularly the Chinese economy," it said.
Such trends raise the risk of worsening business confidence and slower progress toward the central bank's two per cent inflation target.
The BOJ said in a statement that it would divide banks' deposits into three tiers, with categories earning positive, zero and negative interest rates.
It said the policy would continue as long as needed to achieve its inflation target. In the meantime, the BOJ pushed back its timeframe for achieving that goal from late 2016 to mid-2017.
The European Central Bank has already imposed negative interest rates, after leaving interest rates near zero failed to entice banks into seeking higher returns through lending.
In Japan, keeping interest rates near zero has likewise failed to yield the desired results.
Data on Friday showed Japan's core inflation rate for 2015, excluding volatile food prices, at 0.5 per cent.
That and other figures show the economy remained anemic last year, as stagnant incomes, the slowdown in China and the mixed blessing of lower oil prices hobbled Prime Minister Shinzo Abe's recovery strategy.
Consumer spending fell 4.4 per cent in December from a year earlier, as households chose to save rather than splurge on any gains from the low oil prices that are slowing inflation. It was the fourth straight month of year-on-year declines.
Industrial output fell 1.6 per cent in December from a year earlier, partly due to slower demand for machinery and electronics components and devices in China.
"Today's activity data were disappointing and suggest that Japan's economy barely grew last quarter," Marcel Thieliant of Capital Economics said in a commentary.
Abe took office three years ago vowing to get growth back on track through massive injections of cash by the government and central bank, and by sweeping reforms to boost competitiveness.
The central bank said Friday it would also persist with its "quantitative easing" purchases of about 80 trillion yen (about $660 billion US) of government bonds a year.
The aim is to end a long spell of deflation, or falling prices, that is thought to be discouraging corporate investment. But while corporate profits have soared as massive stimulus weakened the Japanese currency, making earnings made abroad worth more when converted into yen, investment and wages have lagged.
Average incomes fell 2.9 per cent from a year earlier in December. Even though unemployment was steady at 3.3 per cent and the job market remained tight, companies wary over the economic outlook are opting not to raise pay.
Some economists contend that the "Abenomics" focus on inflation as a spur to growth is misplaced.
A recent analysis by economists at the Asian Development Bank Institute concluded that the main obstacle to faster growth in Japan is its aging and shrinking population.
Wasteful and unproductive spending by local governments and the reluctance of banks to lend to small and startup businesses are also slowing a restructuring of the economy needed to revitalize growth, it said.
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