TOKYO, Sept 21 (Reuters) - Japanese stocks rose nearly 2 percent on Wednesday after the Bank of Japan overhauled its monetary policy, potentially easing pressure on banks and insurers.
Investors also hoped the BOJ's revamped plan would see it buying a greater variety of exchange-traded funds (ETFs).
The benchmark Nikkei average ended up 1.9 percent, its biggest one-day percentage rise since Aug. 29, at 16,807.62 points.
The BOJ added a long-term interest rate target to its massive asset-buying programme on Wednesday, overhauling its policy framework and recommitting to reaching its 2 percent inflation target as quickly as possible.
The central bank also kept its policy rate at minus 0.1 percent amid prior speculation it might take rates further into negative territory. It will try to keep the yield curve steep by maintaining long-term rates, which had previously sank deep into the negative, around zero percent.
Both steps are expected to help financial institutions by not increasing the burden of negative short term rates, which has crimped banks' profits. It may also improve income from their holdings of long-term debt, much of which had burdened investors with negative yields.
"The central bank's decision to keep the 0.1 negative interest rate gave the impression that the BOJ gave full consideration to banks' businesses," said Norihiro Fujito, senior investment strategist at Mitsubishi UFJ Morgan Securities.
The BOJ also said it would diversify its exchange traded funds (ETF) purchases, with 2.7 trillion yen ($26.33 billion) to be allocated and linked to the Topix index. Banks make up a large part of the market cap in the index.
"There had been speculation in the market that the BOJ would buy TOPIX-linked exchange traded funds for a while. Now that the BOJ announced it, it means it understood the market's concern that its effort to buy Nikkei-linked ETFs was distorting valuations and liquidity in some individual stocks," said Fujito at Mitsubishi UFJ Morgan Stanley Securities.
"Overall, the outcome was positive for the stock market."
Japan's insurers rose 5.5 percent and banks gained 6.9 percent, and were the top performers on board.
Mitsubishi UFJ Financial Group Inc jumped as much as 7.5 pct to a two-week high and Mizuho Financial Group rose as much as seven percent.
Dai-ichi Life Insurance Co Ltd jumped as much as 10.1 percent to an eight-month high, Sompo Japan Nipponkoa Holdings rose as much as 4.7 pct.
Exporters also rose as the yen slumped against the dollar in the wake of the BOJ decision.
Toyota Motor Corp added 3.2 percent and Panasonic Corp rose 3.3 percent. Honda Motor Corp advanced 4 percent.
The broader Topix gained 2.7 percent to 1,352.67 and the JPX-Nikkei Index 400 rose 2.8 percent to 12,140.66.
$1 = 102.5400 yen Editing by Kim Coghill