BOJ May Inject More Cash After Keeping Rate at 0.5%

By Mayumi Otsuma

Sept. 17 (Bloomberg) -- The Bank of Japan said it's ready to provide more cash after pumping 5.5 trillion yen ($51.8 billion) into money markets unsettled by the U.S. financial crisis.

``The bank will continue to strive to ensure smooth settlement of funds and maintain market stability,'' it said in a statement after Governor Masaaki Shirakawa and his colleagues left the target for the overnight lending rate at 0.5 percent.

Central banks from Frankfurt to Sydney added more than $200 billion this week to make sure banks keep lending to each other following the collapse of Lehman Brothers Holdings Inc. and rescue of American International Group Inc. World market turmoil may crimp global growth, reducing demand for Japan's exports and weakening an economy that's on the brink of a recession.

``The BOJ is sending a message that its best approach to the market turbulence is to provide as much liquidity as needed, not to change interest rates,'' said Junko Nishioka, an economist at RBS Securities Japan Ltd. in Tokyo. ``The bank is trying to figure out how badly the external shocks will affect the economy at home.''

Global stock markets have rebounded since reeling from Lehman's bankruptcy this week. The Nikkei 225 Stock Average advanced from a three-year low today after the U.S. government said it would take over New York-based AIG, the country's largest insurer, to save the firm from collapse.

Market `Tensions'

``Economic growth has been sluggish against the backdrop of higher energy and material prices and weaker growth in exports,'' the Bank of Japan said, repeating language introduced last month. ``Tensions in global financial markets have increased and there are downside risks to the world economy.''

The yen traded at 105.88 per dollar at 4:03 p.m. in Tokyo from 105.99 before the announcement. The Nikkei rose 1.2 percent.

The Bank of Japan injected 3 trillion yen into the banking system today after the overnight rate surged to 0.65 percent, and yesterday added 2.5 trillion yen. ``Japan's money market has been functioning well,'' the central bank said.

The policy board may want more evidence that weakening global growth will derail the world's second-largest economy before deciding whether to cut borrowing costs, already the lowest in the industrialized world. The bank today reiterated that prolonging a low-rate policy could hamper the nation's prospects for sustainable growth in the long term.

Focus on Damage

``We think the Japanese economy is already in a recession and now the focus is on how much damage the latest external shock will cause,'' said Yoshimasa Maruyama, a senior economist at BNP Paribas Securities Japan Ltd. in Tokyo. Still, ``a rate cut isn't among the bank's options because BOJ policy makers have said monetary conditions are already very accommodative.''

Protracting low rates may ``lead to swings in economic activity and prices,'' the bank said. Shirakawa made similar remarks in speeches in August and this month.

Japan will recover as commodity prices ease and other economies improve, the central bank repeated today, adding that it will implement policy flexibly.

Recent reports show resilience in Japan's economy even after it shrank an annualized 3 percent last quarter, the sharpest contraction since 2001. Exports, production and housing starts all rose in July, and crude oil has plunged 35 percent since exceeding $147 a barrel for the first time on July 11.

``With commodity prices tumbling, the Japanese economy should be among the first to recover as the global inflation shock recedes,'' said Julian Jessop, chief international economist at Capital Economics Ltd. in London. ``Japan has avoided the fundamental economic and financial imbalances now undermining so many Western economies.''

Unanimous Decision

Today's rate decision was unanimous, and predicted by all 33 economists surveyed by Bloomberg News. Of 29 who gave predictions through June, 24 said there will be no move by then. Four estimated higher rates and one forecast a cut.

Inflation will hover around a decade high in coming months before moderating, the central bank said. Consumer prices excluding fresh food rose 2.4 percent in July, the fastest rate since 1997, outpacing wage growth.

The bank said it's watching ``inflation expectations of households and the price-setting behavior of firms in addition to developments in energy and materials prices.''

``Commodity markets are going through an adjustment, but core consumer prices will hover around 2 percent because companies continue to pass on food and energy costs,'' said Jun Ishii, chief fixed-income strategist at Mitsubishi UFJ Securities Co. in Tokyo. ``The BOJ won't cut rates to spur growth nor raise them to contain inflation for the time being.''

To contact the reporter on this story: Mayumi Otsuma in Tokyo at motsuma@bloomberg.net