Interest rate cuts are typically a bullish scenario for share prices and, if not for the volatility on Wall Street and other unnerving developments both at home and abroad, the Tokyo stock market should have reacted positively to the Bank of Japan’s latest move to ease its grip on credit.

Actually, however, the news of the discount rate cut and other measures has gone largely unheeded. Investors are opting to play it safe in the choppy market. Conventional wisdom holds, nevertheless, that lower borrowing costs go a long way toward helping shore up share prices.

On Feb. 9, the BOJ’s policy-setting committee decided to cut the discount rate, introduce a Lombard-type lending facility and resume outright purchases of short-term government securities.

Still, the BOJ has yet to work out the details of conditions for the new lending facility, including how to handle securities and other assets banks keep at the BOJ as collateral and how long the loan can be rolled over.

The member banks usually keep excess reserves at the BOJ and if those excess reserves can be used to cover loans they get under the new facility, they can meet a pickup in demand for funds easily and quickly.

Under the Lombard-type facility, banks can obtain overnight loans. The question is how long such loans can be rolled over. The longer the rollover is allowed, the more assured the lending will be.

What’s more, the new facility can put downward pressure on term interest rates in the short-term money market.

In the case of the European Central Bank’s Lombard facility, the prescribed interest rate serves as a ceiling on overnight loans in the banking industry.

The BOJ appears aiming to have its Lombard interest rate serve as a ceiling on term interest rates for borrowings for one to several months. For this purpose, the BOJ apparently is considering allowing the Lombard loans to be rolled over for a week or longer.

If this proves to be the case, the short-term money market will have more room to nudge interest rates lower, which will no doubt be good news for share prices.

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