The Bank of Japan’s cut Friday in the benchmark interest rate by 0.2 percentage point to 0.3 percent is aimed at increasing liquidity in the money market amid the global financial turmoil, BOJ Gov. Masaaki Shirakawa said.
The central bank governor said financial markets around the globe have changed drastically over the past month, with stock prices tumbling, the credit spread on corporate bonds widening and the yen surging against other major currencies.
“Given these changes in the economic and financial conditions, it is necessary to lower the key interest rate and secure the liquidity (of the monetary market),” Shirakawa told a news conference after the Policy Board meeting.
But at the same time, he said that too large a cut would hamper the functioning of the Japanese monetary market. The BOJ had until Friday long held the view that the 0.5 percent level was low enough.
“If we focused more on the effectiveness of the loose monetary stance, we could have cut the rate deeper,” he said. “But it would affect negatively the functioning of the financial markets, particularly the money market,” he said.
That is why Shirakawa believes the 0.2-point cut is the best decision, while four of the eight members who opposed the cut at Friday’s Policy Board meeting actually supported a 0.25-point cut, he said.
Shirakawa also claimed there has been no political pressure on the BOJ to cut the rate.
As for the possibility of the BOJ buying stocks owned by financial institutions to protect their financial health during big stock fluctuations, Shirakawa repeated that the central bank is considering such a step.
Reaction to cut
The government welcomed the Bank of Japan’s decision Friday to cut its key interest rate by 0.2 percentage point to 0.3 percent as an internationally coordinated action to address the global financial crisis, economic ministers said, while the largest opposition party called the rate cut late.
The rate cut indicates the BOJ’s resolve to “grapple firmly with the credit crisis” and to “keep in step with” other central banks, which have eased their credit grip, economic and fiscal policy minister Kaoru Yosano said at a press conference.
Policymakers of the central bank “reached a good conclusion from the viewpoint of domestic and international” economic conditions, Finance Minister Shoichi Nakagawa told reporters.
But Yukio Hatoyama, secretary general of the Democratic Party of Japan, said some members of his party believe the BOJ should have lowered its benchmark rate earlier in tandem with other central banks, to stabilize financial markets and prop up the economy.