BOJ reduces key interest rate to 0.1%

Fall to near zero spurred by yen's rise, pressure after Fed action

by Hiroko Nakata

The Bank of Japan cut its key interest rate to 0.1 percent from 0.3 percent Friday in the face of pressure to take a bold step to check the yen’s rise and provide more liquidity to cash-strapped firms amid the deepening recession.

Speculation had been rife that the BOJ would cut the rate, the second cut in seven weeks, since the U.S. Federal Reserve Board adopted a near-zero interest rate policy this week to stem further financial turmoil.

The Fed’s move dropped its funds rate below the Japanese key rate and, as a result, accelerated the yen’s rise against the dollar. The dollar briefly traded below ¥88 earlier this week, its lowest level in 13 years.

“The BOJ announced all the measures that have been speculated on,” said Hideo Kumano, chief economist at Dai-ichi Life Research Institute Inc. and a former BOJ official. “I guess that’s because the central bank has fears about the recent currency rates.”

In addition to the rate cut, the BOJ said it will buy commercial paper issued by corporations to smooth their financing toward the end of the year.

The central bank will also increase the amount of its outright purchases of government bonds from financial institutions from ¥1.2 trillion to ¥1.4 trillion a month to provide longer-term funds.

“Today’s announcement means the central bank has half-entered into quantitative easing,” said Takahide Kiuchi, chief economist at Nomura Securities Co. “I expect the BOJ to further cut rates to zero and adopt a quantitative easing policy again within a few months.”

Experts said Friday’s move by the BOJ will have an impact on the economy, as the yen would have climbed further and sent stocks plunging again had the central bank failed to act.

But Kumano said the rate cut may not be enough to stem the yen’s recent uptrend, as there is already speculation that other central banks will move to lower their rates.

When the dollar falls against the yen to the levels seen this week, it severely impacts the exports and income of Japan’s blue-chip firms, including Toyota Motor Corp., Honda Motor Co. and Sony Corp.

Later in the day, BOJ Gov. Masaaki Shirakawa admitted the yen’s sharp rise was one of the factors that prompted the central bank to act.

“Our judgment on the economy does not only focus on the yen’s strength, although it is one of factors for the overall economic downturn,” he said.

“We have agreed that the current situations of the economy and the financial markets are very severe. Based on that view, we are aiming to stimulate the economy by lowering the interest rate,” Shirakawa said.

Earlier this week, calls for the BOJ to ease its monetary stance further mounted from business and the government.

Asked if he was hoping for a rate cut, Honda President Takeo Fukui told a news conference Wednesday, “As far as Japan is a country depending on exports, I hope for a more active move (by the BOJ) to stabilize currency rates.”

On the same day, Honda announced it will log a ¥190 billion group operating loss in the second half of the business year to March amid the global economic downturn and the yen’s rise against the dollar.

“The yen’s rise is something abnormal and deviates from the real economy,” Fukui said.

“Everyone believes the Japanese economy is showing a downturn now,” Finance Minister Shoichi Nakagawa told reporters Tuesday. “It is the BOJ’s responsibility to avert it, if the central bank shares the same view, since the BOJ and the government are both responsible for cooperating with each other on economic policy.”

The global economy has rapidly deteriorated since the collapse of U.S. investment bank Lehman Brothers Holdings Inc. in September, and the Japanese economy is feeling the effects.

Friday’s rate cut by the BOJ came just four days after the central bank’s “tankan” survey showed the confidence of large manufacturers suffered its steepest fall in 34 years.

However, the BOJ had been widely believed to be reluctant to return to a quantitative easing monetary policy, in which it has to maintain interest rates at around zero and is left with little room to manipulate rates.

The BOJ maintained a quantitative easing policy for five years from 2001, under which the central bank flooded the financial system with liquidity to drive the unsecured overnight call rate to near zero.

Exporters dumped

The Associated Press

Japanese shares fell Friday as investors dumped exporters over the strong yen, while the market shrugged off the Bank of Japan’s much-expected rate cut, which followed that of the U.S. Federal Reserve.

The benchmark Nikkei 225 stock average declined 78.71 points, or 0.9 percent, to 8,588.52. The broader Topix index lost 0.5 percent to 834.43.

“A strong yen continued to weigh down on the market, dragging down exporters,” said Yutaka Miura, a senior strategist at Shinko Securities Co.

The yen traded at 89.03 to the dollar in Tokyo Friday afternoon, compared with 89.48 in New York late Thursday. Earlier in the week the yen hit 87.11 to the greenback, the weakest level for the dollar since July 1995. A strong yen hurts Japanese exporters by cutting their dollar income from abroad. Top manufacturers, including Toyota Motor Corp., Honda Motor Co. and Sony Corp., have all blamed the strong yen and the global downturn for their poor earning projections.

Miura said the market was little surprised by the BOJ’s move to cut its key interest rate to 0.1 percent from the current 0.3 percent following its two-day Policy Board meeting.

“The rate cut was well expected in the market,” he said. “Rather, investors were focusing on how the U.S. and European markets will do today.”

The Japanese rate cut was widely expected after the U.S. Federal Reserve on Tuesday slashed its benchmark rate to a range of zero to 0.25 percent — the lowest ever.

Gist of BOJ Policy Board meeting

Kyodo News

The following is the gist of the decisions made by the Bank of Japan Policy Board after its two-day meeting that ended Friday in the wake of the U.S. Federal Reserve’s rate cut earlier in the week.

The BOJ Policy Board decided to:

• Lower the unsecured overnight call rate target to 0.1 percent from 0.3 percent by a vote of 7 to 1.

• Lower the basic loan rate applicable under the complementary lending facility to 0.3 percent from 0.5 percent.

• Purchase commercial paper outright from companies to support their cash flow.

Expand outright purchases of long-term Japanese government bonds to ¥16.8 trillion per year (¥1.4 trillion per month) from ¥14.4 trillion per year (¥1.2 trillion per month).

• Change the central bank’s assessment of economic conditions to “deteriorating.”

Toyota fell 2 percent to ¥2,900 and Honda declined 1 percent to ¥1,807. Nissan Motor Co. shed 2.6 percent to ¥296.

Sony rose 0.3 percent to ¥1,821 and Panasonic Corp. jumped 2.9 percent to ¥1,051. Panasonic said after the market close Friday that it will start a public tender offer bid to acquire Sanyo Electric Co. at ¥131 a share. Sanyo dropped 3.5 percent to ¥136.

Nakagawa hails cut

Kyodo News

Finance Minister Shoichi Nakagawa welcomed the Bank of Japan’s decision Friday to lower its key short-term interest rate from 0.3 percent to 0.1 percent and to pump further liquidity into money markets.

“I heartily welcome the BOJ’s judgment, which was made after the bank seriously examined the current economic and financial conditions,” Nakagawa told reporters.

He said the central bank’s move to purchase commercial paper, or corporate short-term debt, outright and to boost its buying of long-term Japanese government bonds is in line with the government’s policy of providing ample liquidity.

“The government and the BOJ share the same goal. We are doing what we should do as an ‘all-Japan’ team,” Nakagawa said.

The government has included in its latest economic stimulus package a program to purchase up to ¥2 trillion in CP to support fundraising efforts by cash-strapped firms. The just-privatized Development Bank of Japan said Thursday it will start buying CP by the yearend.

Senior Vice Finance Minister Wataru Takeshita, who attended the BOJ’s policy meeting as a government representative, also hailed the bank’s move, saying it is “steadfastly implementing what it should do.”