TOKYO // The Bank of Japan cut its key policy rate to 0.10 per cent today, the lowest since 2006, and moved to pump funds into the market to ease a corporate credit crunch as the yen's rise and crumbling demand batter the economy. The move took the BoJ's overnight call rate, at which it lends to financial institutions, to its lowest level since July 2006, when it ended its zero rate policy. A dramatic rate cut by the Federal Reserve on Tuesday, which took US rates below Japan's, and the yen's subsequent rise to a 13-year high against the dollar had ratcheted up government pressure for BoJ action to help an economy already in recession.
The yen briefly dipped against the dollar, Japanese government bond futures erased losses and Tokyo share prices temporarily turned positive after the central bank move. Analysts welcomed the BoJ's decision but said the central bank was likely to face pressure to act further. "The economy is worsening very quickly and the BoJ and the government will need to keep working closely," said Hideo Kumano, the chief economist at Dai-ichi Life Research Institute.
"But there is still no guarantee that the announced steps will be able to stop the economy from collapsing," he said. He added that the central bank might move to near-zero rates early next year then introduce a quantitative easing policy, the final option of any central bank in which the financial system is awash with cheap funds to try to revive lending. Japan's government forecast earlier today that the economy would not grow in the fiscal year from April 1, although a slew of stimulus packages would keep it from contracting.
That contrasted with bleaker private sector predictions that the deepening global malaise will hit the export-driven economy hard. The government acknowledged, though, that Japan's recovery might be delayed if global conditions worsened. The Bank of Japan also lowered its assessment of the economy, saying conditions would likely worsen in the near-term. The main decision by the BoJ board was by a vote of 7-1.
Besides cutting the overnight call rate, the BoJ also sliced its Lombard rate, at which banks can borrow directly from the central bank, to 0.3 per cent from 0.5 per cent. Cutting the Lombard rate could ease money market strains as it sets a ceiling for call rates and other interbank rates. To smooth fund supply, the BOJ decided to raise the amount of Japanese government bonds it buys each month to 1.4 trillion yen from 1.2 trillion yen, and purchase a wider type of bonds.
It also decided to temporarily buy commercial paper outright, following in the footsteps of the US Federal Reserve, despite strong reservations expressed by BOJ officials in the past about accepting such assets with credit risk. Commercial paper is a form of short-term unsecured borrowing often used by companies to fund day-to-day operations. The global credit crisis has seized up the commercial paper market, forcing many Japanese companies to boost borrowing from banks at a record pace as they set aside cash at the year-end, when demand for funds tightens.
The Bank of Japan already accepts commercial paper as collateral in its fund operations but had been hesitant to directly purchase them. The central bank last cut its key policy rate to 0.3 per cent from 0.5 per cent in October and unveiled a series of measures to ease credit strains as the fallout from the global financial turmoil spread. Japan, like the United States, is already in recession, with companies such as carmakers Toyota and Honda slashing output and profit forecasts as customers close their wallets worldwide.
Adding to the pain, the Fed's rate cut triggered a sharp yen rally with US interest rates, at 0-0.25 per cent, falling below Japan's 0.3 per cent for the first time since February 1993. The government warned currency markets on Thursday of possible intervention to stem the yen's rise, which erodes the value of profits Japanese firms earn overseas, adding to pressure on the BoJ to support the export-dependent economy.