Bank of Japan May Cut Rate, Pump Funds Into Economy

By Mayumi Otsuma

Dec. 19 (Bloomberg) -- The Bank of Japan may trim interest rates today and introduce new ways of pumping funds into the banking system to bolster the ailing economy.

Governor Masaaki Shirakawa and his colleagues may lower the overnight lending rate from 0.3 percent, the second reduction in two months, economists said. The bank may also offer to buy more government bonds from lenders, start purchasing commercial paper from them and broaden the range of collateral it accepts.

The global economy is in the worst state since the Great Depression, intensifying the risk for a prolonged slump in Japan, Shirakawa told parliament on Dec. 16. The U.S. Federal Reserve’s decision later that day to cut its rate to as low as zero fueled speculation that Japan will follow suit.

“With the Fed action, it’s become more likely the Bank of Japan will also cut,” said Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management Co. in Tokyo, who now expects a reduction to 0.1 percent today.

Investors yesterday saw a 57 percent chance that the policy board will lower the key overnight rate today, according to calculations made by JPMorgan Chase & Co. based on interest-rate swaps trading, up from 20 percent on the morning of Dec. 16.

The central bank will probably announce its decision by early afternoon. Shirakawa will speak at a press conference at 3:30 p.m. in Tokyo. Jiji Press and the Mainichi newspaper today reported the central bank will likely leave the rate unchanged.

Stronger Yen

The Fed’s reduction brought the U.S. key rate lower than Japan’s benchmark for the first time since 1993 and caused the yen to surge to a 13-year high, hurting Japanese exporters already reeling from a collapse in overseas demand.

Honda Motor Co. cited the yen’s gains and slumping sales as reasons for slashing its full-year profit forecast by 62 percent this week. President Takeo Fukui described the currency’s level of around 89 yen to the dollar as “abnormal” and called on the government and central bank to take “swift action.”

“With U.S. rates now lower than Japan’s, there’s the risk that the yen will keep strengthening,” said Nobuto Yamazaki, executive fund manager at Diam Asset Management in Tokyo. “Now that the U.S. has a zero-rate policy, there’s no point for the Bank of Japan to hold its key rate at 0.3 percent.”

Confidence among Japan’s major manufacturers fell the most in 34 years, the central bank’s quarterly Tankan survey showed this week. Nissan Motor Co., Canon Inc. and Sony Corp. are among the exporters cutting production, spending and jobs, deepening the country’s first recession since 2001.

The bank will probably lower its assessment of the economy today, said Teizo Taya, a former central bank policy maker.

‘Fallen Apart’

“The bank’s forecast that the economy would return to potential growth by 2010 has fallen apart,” said Taya, now head of the Daiwa Institute of Research in Tokyo. “A downward revision is just unavoidable.”

Prime Minister Taro Aso and Finance Minister Shoichi Nakagawa said over the past week they want the central bank to inject more cash into the economy to help companies borrow.

Japanese banks’ borrowing costs fell for a second day yesterday, halting the longest increase since July 2006, on growing speculation the central bank will cut interest rates. The Tokyo three-month interbank offered rate, or Tibor, declined to 0.918 percent yesterday from a decade-high 0.922 percent on Dec. 16, according to the Japanese Bankers Association.

Some economists say the central bank will avoid lowering rates and instead focus on steps to provide more funds. Shirakawa has repeatedly said further rate reductions would impede the flow of funds in the economy by making it unprofitable to trade in the money market.

Zero-Rate Policy

“If we can trust BOJ officials’ remarks, the chance that it will adopt the zero-rate policy isn’t high, though we can’t rule it out completely,” said Ryutaro Kono, chief economist at BNP Paribas in Tokyo.

The central bank may offer to increase its monthly government bond purchases from lenders, one of its main tools for adding funds to the banking system. The purchases have been kept at 1.2 trillion yen ($13.7 billion) since October 2002.

The bank may also begin to buy commercial paper from lenders outright. Currently it accepts such short-term corporate debt only as collateral, with repurchase agreements. Prime Minister Aso announced last week that the government will start buying the securities.

Shirakawa said this week the bank hasn’t dismissed the possibility of buying commercial paper, while adding that policy makers must consider how buying riskier assets would affect its balance sheet.

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