BOJ lowers key rate to 0.1% amid gov't pressure, Fed's move+

TOKYO, Dec. 19 Kyodo -
The Bank of Japan cut its key interest rate to 0.1 percent from 0.3 percent
Friday, bowing to pressure from the government to do more to prop up the
flagging Japanese economy and stem a further rise of the yen against the U.S.
dollar.
The move follows the U.S. Federal Reserve's decision earlier this week to lower
its benchmark rate to effectively zero percent, which has sent the U.S.
currency to its lowest levels in 13 years against the yen and prompted Japanese
lawmakers to fret about the negative impact on the nation's flagship exporters
such as car makers.
The BOJ lowered the target rate for unsecured overnight call money for the
second time in three months, while BOJ Governor Masaaki Shirakawa did not rule
out the possibility of a further rate reduction.
''I cannot say there will be absolutely no more'' rate cuts, Shirakawa told a
news conference after a two-day policy meeting through Friday. He also
acknowledged the bank's Policy Board had weighed the yen's appreciation during
the meeting.
Japan's economic conditions have been ''deteriorating,'' the BOJ said in its
statement, revising downward its basic assessment and adopting the expression
for the first time in six and a half years. It said in November that the
economy was ''sluggish.''
A 0.2 percentage point cut was almost in line with market expectations.
The eight-member board voted 7-to-1 for the rate decision, which followed the
panel's 0.2-percentage-point reduction in the target rate, a benchmark cost in
the interbank borrowing market, to 0.3 percent in October.
The BOJ also took additional emergency measures to facilitate corporate
financing at a time when companies have increasingly faced difficulty raising
operating capital through debt markets.
It decided to temporarily conduct outright purchases of commercial paper, or
short-term debt issued by companies, from financial institutions.
At present, the central bank accepts CP only as collateral when lending to
those institutions on the condition they repurchase the debt from the central
bank.
The policy shift means the BOJ will accept further credit risks, and Shirakawa
said the outright purchase of CP is one of ''the most abnormal of all
abnormal'' measures a central bank can take.
The BOJ will increase its outright purchases of Japanese government bonds to
1.4 trillion yen a month from 1.2 trillion yen in an attempt to supply
long-term funds and boost liquidity in the capital and corporate debt markets,
while expanding the scope of JGBs it accepts in the operation.
''We must still be cautious about downside risks'' to the Japanese economy, the
governor also said. Economic conditions are ''likely to increase in severity in
the immediate future.''
The bank lowered the basic loan rate applicable under the complementary lending
facility, through which banks borrow directly from the BOJ, to 0.3 percent from
0.5 percent.
It will continue to pay 0.1 percent interest on the current account deposits of
banks held at the BOJ in order to prevent the main lending rate from falling
excessively while the bank injects liquidity into money markets.
The BOJ seems to have mobilized every possible measure at this moment, said
Koji Takeuchi, senior economist at Mizuho Research Institute Ltd. But he is
doubtful that the BOJ's decision will immediately turn around what is
developing in the currency market.
''The Fed is expected to go further on its credit-easing path by boosting
liquidity'' even after lowering interest rates to near zero, Takeuchi said.
''If the differentials between U.S. and Japanese long-term interest rates are
narrowed, it could only boost the value of the yen to the dollar.''
Shirakawa appeared negative about reemploying the ultra-loose ''quantitative
easing'' policy, under which the BOJ used the outstanding balance of the
current account deposits as a monetary policy tool instead of conventional
interest rate manipulation.
The BOJ chief said the quantitative easing policy, which was adopted between
2001 and 2006 to inject ample liquidity into the financial system, was
effective in terms of stabilizing the system itself but not very much in
boosting the sluggish economy.
The government had increasingly called on the BOJ to ''share the recognition''
of the current crisis, while Prime Minister Taro Aso has announced a series of
stimulus packages to ward off negative effects from the global economic
slowdown.
''I hail'' the decision by the BOJ, Aso told reporters. ''I think it was quite
timely.''
Finance Minister Shoichi Nakagawa said, ''The government and the BOJ share the
same goal,'' adding, ''We are doing what we should do as an 'all-Japan' team.''
On Friday morning before the bank's policy meeting, Economic and Fiscal Policy
Minister Kaoru Yosano said at a press conference that a rate cut at this time
would be ''meaningful as a message.''
Yosano, widely known as being close to the BOJ and seen as having given the
final push to the bank when it cut the rate in October, said, ''It's the BOJ
that makes the decision,'' denying any government pressure on the bank.
==Kyodo
2008-12-19 23:58:02