BOJ Cuts Key Rate to 0.1%, Pumps Funds Into Economy

By Mayumi Otsuma

Dec. 19 (Bloomberg) -- The Bank of Japan cut its benchmark interest rate to 0.1 percent and said it would buy corporate debt as a deepening recession chokes off funding for businesses.

Governor Masaaki Shirakawa and his colleagues lowered the target for the overnight lending rate from 0.3 percent in a 7- to-1 vote, the central bank said in a statement today in Tokyo. The bank said it would buy commercial paper temporarily and a decision to increase its monthly purchases of government bonds sparked a rally in the market.

The central bank’s second reduction in two months came after the Federal Reserve this week cut its target rate as low as zero, driving the yen to a 13-year high against the dollar. Shirakawa said the policy board made the “most extraordinary” decision to buy short-term corporate debt and take on credit risk because economic and price conditions are “so severe.”

“The Bank of Japan decided to use all available tools to prevent the economy from falling off a cliff now, rather than save them for the future,” said Masaaki Kanno, chief economist at JPMorgan Chase & Co. in Tokyo and a former Bank of Japan official. “Like the Fed, the BOJ’s focus is not on rates but on buying debt and pumping cash into financial markets.”

The yen rose to 88.72 per dollar as of 5:20 p.m. in Tokyo from 89.28 shortly before the decision. Bonds rose, reversing earlier declines, sending the yield on the 10-year bond down 4 basis points to 1.22 percent. The Nikkei 225 Stock Average slid 0.9 percent and has lost 44 percent this year.

Noda’s Dissent

Tadao Noda was the sole board member to oppose the rate cut. Shortly before the announcement, investors saw a 50 percent chance of a cut, according to calculations made by JPMorgan based on interest-rate swaps trading.

“I’ve never experienced such a sudden change in conditions,” Shirakawa said at a news conference.

The central bank said it will raise its monthly government bond purchases from lenders, its main tool for adding funds into the banking system, to 1.4 trillion yen ($15.6 billion) from 1.2 trillion yen, the first increase since October 2002. It will broaden the range of debt it buys to include 30-year, floating- rate and inflation-indexed bonds.

The bank may start buying other assets as well. Staff will “investigate how other corporate financing instruments may be employed” and report their findings to the policy board “as swiftly as possible,” the statement said.

Support for Companies

“Whereas the Fed is dramatically expanding its balance sheet to offer support to financial institutions, the Bank of Japan is now expanding its balance sheet to support the corporate sector,” said Glenn Maguire, chief Asia-Pacific economist at Societe Generale SA in Hong Kong.

The government also decided to purchase commercial paper outright last week, and today said it would buy as much as 20 trillion yen ($223 billion) of shares held by banks to boost their capital.

Chief Cabinet Secretary Takeo Kawamura said the central bank’s decision was “timely and appropriate.” Prime Minister Taro Aso and Finance Minister Shoichi Nakagawa said over the past week they wanted the bank to play its part in helping companies borrow. Commercial paper markets this month touched the highest in at least the past four years.

Japanese banks’ borrowing costs fell for a third day today on speculation the central bank would cut. The Tokyo three-month interbank offered rate, or Tibor, declined to 0.905 percent after reaching a decade-high 0.922 percent on Dec. 16.

ECB May Pause

The moves by Japan and the U.S. contrast with the European Central Bank, which this week signaled it may keep the benchmark rate at 2.5 percent for the time being. ECB President Jean- Claude Trichet said further reductions may fail to spur lending.

Japan’s central bank cut its assessment of the economy, saying “conditions have been deteriorating and are likely to increase in severity.” In November, it said growth had become “increasingly sluggish.”

The Fed’s reduction brought the U.S. key rate below Japan’s benchmark for the first time since 1993, making the yen a higher-yielding currency. The yen has gained 25 percent this year, eroding profits for exporters that are already cutting jobs, production and spending as global demand collapses.

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.”

The Fed’s move “prompted the BOJ to take measures to prevent further yen appreciation,” said Kanno at JPMorgan. Shirakawa “simply had no choice but to realize this historical deterioration in the economy.”

Confidence among Japan’s major manufacturers fell the most in 34 years, the bank’s quarterly Tankan survey showed this week, indicating the first recession since 2001 is likely to deepen.

The world’s second-largest economy could shrink 0.8 percent next fiscal year if the government doesn’t implement stimulus measures, Economic and Fiscal Policy Minister Kaoru Yosano said today. The Cabinet Office today predicted zero growth for the year starting April 1.

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