In a surprise move, the Bank of Japan’s Policy Board agreed Wednesday to further ease monetary policy by guiding the weighted average of the overnight call money rate down to around 0.25 percent per year.
The decision to further slash the key short-term interest rate shows that the central bank has finally decided to assist economic recovery through monetary measures.
In response, the dollar surged against the yen in currency markets, with the greenback at one point touching the mid-137 yen level in early London trading. The dollar stood at 133.39-42 yen in Tokyo late Wednesday.
The move is the first relaxation of monetary policy by the BOJ since September 1995, when the central bank lowered the official discount rate to a record low of 0.5 percent.
BOJ Gov. Masaru Hayami told a news conference later in the day that the central bank made the decision independently and that no international cooperation was behind its action.
Until now, the call money rate on average stood slightly below the 0.5 percent official discount rate, and the policy board questioned the efficacy of monetary measures in spurring the economy.
Further easing of the central bank’s monetary policy is the focus of controversy amid growing concerns both at home and abroad over stagnant business and economic conditions in Japan.
The decision was made by a majority vote of the board’s nine members, according to the BOJ. The policy board did not touch the official discount rate, which it charges on loans to commercial banks.
“Economic conditions are deteriorating and prices are in a downward trend,” the bank said in a statement. “Under the current situation, the possibility of further (economic) deterioration cannot be ruled out.”
The bank thus decided to provide additional funds to money markets by easing its policy stance, aiming to prevent the economy from falling into a deflationary spiral, the BOJ said.
The overnight call money rate is the rate at which financial institutions lend surplus funds to other financial institutions that need money to fund their activities. The call market is the most important place for commercial banks to raise funds to finance their daily lending and deposit-refunding activities, while allowing financial institutions with surplus funds to capitalize on interest accruing from the call money they lend.
Akiyoshi Takumori, chief economist at Sakura Securities Co., praised the BOJ for surprising the financial markets “at the perfect time.”
“The BOJ tried to stabilize the global economy,” Takumori said.
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