By Mayumi Otsuma
Dec. 20 (Bloomberg) -- Bank of Japan Governor Masaaki Shirakawa is preparing more measures to prevent the recession from deepening after the speed of the economy’s deterioration forced him to cut interest rates to near zero.
Shirakawa and six of his seven policy-making colleagues yesterday voted to reduce the overnight lending rate to 0.1 percent from 0.3 percent. The bank will also start purchases of commercial paper, taking on the risk of corporate default.
“I’ve never experienced such a sudden change in conditions,” Shirakawa said at a news conference yesterday. The bank’s staff will “investigate how other corporate financing instruments may be employed” and report their findings to the policy board “as swiftly as possible,” he said.
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. Japan’s business confidence slumped the most in 34 years, the central bank’s quarterly Tankan survey showed this week, a sign companies are likely to cancel spending plans and cut more jobs.
“The Japanese economy will deteriorate at a drastic pace next year and the Bank of Japan is aware of it,” said Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management Co. in Tokyo. “The bank will have to cut rates to zero by the end of March and do more later on.”
The world’s second-largest economy is “deteriorating,” the bank said, lowering its assessment from “increasingly sluggish” in November.
Credit Crunch
Funding for Japanese companies dried up amid a global credit crunch. Japan’s interbank offered rate for three-month loans, Tibor, rose to the highest in a decade earlier this week before falling three straight days.
To help unfreeze the credit market, the bank will buy commercial paper from financial institutions for the first time, taking on the risk that some companies might default on their debt.
“The measure will have a sizeable impact, as corporations have acute short-term fundraising needs,” said Hironari Nozaki, an analyst at Nikko Citigroup Ltd. in Tokyo.
The bank will also 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 and will broaden the range of debt it buys to include 30-year, floating-rate and inflation-indexed bonds.
Positive Message
“The Bank of Japan offered the fullest range of policy measures that it can afford at this stage,” said Mari Iwashita, chief market economist at Daiwa Securities SMBC Co. in Tokyo. “Though the steps may not give a big boost to the economy, they do send a positive message.”
Japanese bonds rose after the decision, pushing 10-year yields to the lowest level since July 2005. The Nikkei 225 Stock Average slipped 0.9 percent.
The rate cut failed to temper gains in the yen, which rose to 88.93 per dollar as of 7:30 p.m. in Tokyo yesterday from 89.28 shortly before the decision. The yen has climbed 25 percent against the dollar this year.
Shirakawa refrained from cutting the central bank’s overnight rate all the way to zero, arguing that even at 0.1 percent, preserving a positive rate will help the functioning of the money market.
Money-Market Trading
“Keeping positive interest rates can manage to maintain incentives for money-market trading and the market mechanism,” Shirakawa said. “We set the benchmark rate at 0.1 percent by very carefully balancing the impact on the market function and support for the economy.”
Bank of Japan policy makers pledged in today’s statement that they will do their “utmost” to return the economy to an expansionary path.
“The BOJ cannot solve all the problems that Japan is facing,” said Kirby Daley, senior strategist at Newedge Group in Hong Kong. “These are steps that need to be taken to try to buffer the troubles that they’re going to have in 2009, but they don’t have all the answers, just like the Fed doesn’t have all the answers.”
To contact the reporter on this story: Mayumi Otsuma in Tokyo at motsuma@bloomberg.net
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