BOJ cuts its key rate to zero

by Hiroko Nakata

The Bank of Japan cut its key interest rate effectively to zero Tuesday, pledging to hold that line until the end of deflation is in sight.

Adding to the surprise news, the BOJ also said it will set up a ¥5 trillion fund to buy various financial assets, ranging from long- and short-term government securities, commercial paper, corporate bonds, exchange-traded funds and Japan real estate investment trusts, in an effort to lower long-term interest rates as well as to encourage investors to buy financial products with risks.

The BOJ’s actions were credited with sparking a Tokyo stock surge and minor rise in the dollar.

“The BOJ decided on the comprehensive easing to strongly promote the monetary easing,” BOJ Gov. Masaaki Shirakawa told a news conference after a two-day Policy Board meeting ended earlier in the day.

The central bank lowered the benchmark interest rate to between zero and 0.1 percent, from the previous 0.1 percent target. The BOJ hadn’t changed the benchmark overnight call rate since December 2008.

The BOJ also said it kept the loan program for banks at ¥30 trillion.

Although the market had been expecting the BOJ to further ease its monetary grip, possibly by expanding the lending program for banks to more than ¥30 trillion, the actual rate cut and establishment of a fund came as a surprise.

In a statement, the BOJ clarified that it is pursuing a “virtually zero interest rate policy” and said the rate will be maintained until the bank can foresee price stability.

“Although Japan’s economy still shows signs of a moderate recovery, the pace of recovery is slowing down partly due to the slowdown in overseas economies and the effects of the yen’s appreciation on business sentiment,” the statement said.

Shirakawa stressed it was important to take the new steps together because of the looming risk of a worsening economy and delayed return to a solid growth path.

“We hope the effect of the monetary easing will be maximized by showing these steps as a package,” the BOJ chief said.