The Bank of Japan surprised markets Friday by announcing plans to increase purchases of exchange-traded funds (ETFs) and lengthening the maturity of bonds it purchases to encourage investment in the economy.

The BOJ said under the new program, it will purchase ETFs at an annual pace of 300 billion yen ($2.45 billion) composed of stocks issued by firms "proactively" investing in physical and human capital.

The plan will start with purchases of ETFs tracking the JPX-Nikkei Index 400, which screens for factors including corporate governance and investor-focused management.

The new ETF purchase program will begin in April and is in addition to the current ETF purchase program of around 3 trillion yen annually.

The BOJ meanwhile held rates steady and said it will stick to its plan to increase the monetary base by 80 trillion yen a year, as expected.

"Governor (Haruhiko) Kuroda has a penchant for surprises, and he delivered another one today," Marcel Thieliant, senior Japan economist at Capital Economics, said in a note Friday.

After the decision, the Nikkei retraced early losses, climbing as much as 2.7 percent, before returning to negative territory and closing down 1.9 percent. The dollar rose against the yen initially, fetching as much as 123.58 yen, compared with around 122.40 yen before the decision. The pair later retraced gains, with the dollar fetching 122.17 yen around 0437 GMT.

The BOJ's new ETF program is aimed in part at offsetting the possible market impact of the the central bank's sales of stock it has purchased from financial institutions since 2002, the BOJ statement said. It plans to take 10 years to sell those shares at a pace of around 300 billion yen annually.