Under growing pressure to act, the Bank of Japan announced Monday it will ease its monetary stance further by expanding a ¥20 trillion lending program to ¥30 trillion, aiming to lower short-term interest rates and curb the yen’s rise against the dollar.

The decision came ahead of the government’s release of its economic stimulus package later in the day. Prime Minister Naoto Kan has urged the central bank to take further steps to shore up the economy, which could be hurt by the recent surges in the yen and declines in the stock market.

BOJ Gov. Masaaki Shirakawa met Kan to explain the bank’s decision and its outlook for the economy. Kan welcomed the step.

Monday’s moves by policymakers followed a botched 15-minute “telephone chat” over the economy between Kan and Shirakawa on Aug. 23 that only disappointed market players who had been expecting action. A day after the incident, the dollar reached a 15-year-low of ¥83.58 in New York, while the Nikkei 225 stock average fell below the key 9,000 mark to close at a nearly 16-month low.

This time, policymakers helped Tokyo stocks over the 9,000 mark. The Nikkei finished 158.20 points higher at 9,149.26. The Tokyo Stock Exchange has been on a downtrend in recent weeks as the stronger yen eats into exporters’ profits.

But Monday’s steps had little effect on the foreign exchange rate. The yen traded at around 85 to the dollar as of 5 p.m.

Government officials made no mention of intervention in the currency market to stem the yen’s gains. The last such action was in March 2004, when the yen was around 109 per dollar.

During Monday’s emergency Policy Board meeting, the BOJ decided to newly provide ¥10 trillion as six-month loans to financial institutions. Together with the existing ¥20 trillion in three-month funds, the overall amount of the loans would be around ¥30 trillion.

Asked about the reason for the decision, Shirakawa said a series of U.S. economic indexes showed weak signs in GDP, employment and consumption since the BOJ held its last regular meeting Aug. 9 and 10. The data led the yen to rise sharply against the dollar and sent stock prices south.

“We (thus) judged it necessary to pay more attention to the downside risks to the outlook for Japan’s economic activity and prices,” he said after the meeting.

Shirakawa shrugged off a question about whether the government pressured the BOJ into acting.

“Our perception that the economy’s downside risks are growing is not much different from that of the government,” he said. “It is very important to show our stance that both the government and the BOJ will take action to support the country’s sustainable economic growth under stable prices.”

The BOJ held the extra meeting one week before its regular board meeting.

The government meanwhile compiled the framework of an economic stimulus package later in the day featuring measures to improve employment and spur consumption, officials said, adding it will be formalized Sept. 10.

The stimulus will use some ¥920 billion in reserve funds under the fiscal 2010 budget.

The move came amid a chorus of calls from business leaders for the government to take immediate action to ease the adverse impact on corporate earnings from the strong yen.

Information from Kyodo added

In a time of both misinformation and too much information, quality journalism is more crucial than ever.
By subscribing, you can help us get the story right.