Tokyo: The Bank of Japan cut its key policy rate to 0.1% on Friday and moved to pump funds into the market to ease a corporate credit crunch as the yen’s sharp rise and crumbling demand batter the economy.
A dramatic rate cut by the Federal Reserve on Tuesday, which took US rates below Japan’s, and the yen’s subsequent rise to a 13-year high against the dollar had ratcheted up government pressure for BoJ action to help an economy already in recession.
Japan’s government forecast earlier on Friday that the economy would not grow in the fiscal year from 1 April, although a slew of stimulus packages would keep it from contracting.
That contrasted with bleaker private sector predictions that the deepening global malaise will hit the export-driven economy hard. The government acknowledged, though, that Japan’s recovery might be delayed if global conditions worsened.
“Looking at employment and companies’ financial conditions, in a broad sense the economy is in a very severe state,” Finance Minister Shoichi Nakagawa told a news conference.
The yen dipped against the dollar, Japanese government bond futures erased losses, and Tokyo share prices briefly turned positive after the central bank move.
The Bank of Japan also lowered its assessment of the economy, saying conditions would likely worsen in the near-term.
Most analysts polled by Reuters on Wednesday had expected the BoJ to cut rates from 0.3%, although some had expected the central bank to opt instead for more steps to ease a credit crunch hurting corporate funding.
The decision by the BoJ board was by a vote of 7-1, with board member Tadao Noda voting against the rate cut.
Japan, like the United States, is already in recession, with companies such as carmakers Toyota and Honda slashing output and profit forecasts as customers close their wallets worldwide.
Adding to the pain, the Fed’s rate cut triggered a sharp yen rally with US interest rates, at 0-0.25%, falling below Japan’s 0.3% for the first time since February 1993.
The government warned currency markets on Thursday of possible intervention to stem the yen’s rise, which erodes the value of profits Japanese firms earn overseas, adding to pressure on the BoJ to support the export-dependent economy.
The central bank also said it would add floating-rate, inflation-linked, and 30-year bonds to its outright buying operations, and would temporarily buy commercial paper outright.
Commercial paper is a form of short-term unsecured borrowing often used by companies to fund day-to-day operations.
The global credit crisis has seized up the commercial paper market, forcing many Japanese companies to boost borrowing from banks at a record pace as they set aside cash at the year-end, when demand for funds tightens.
The Bank of Japan already accepts commercial paper as collateral in its fund operations but has been hesitant to directly purchase them.
The central bank cut its key policy rate to 0.3% from 0.5% in October and unveiled a series of measures to ease credit strains as the fallout from the global financial turmoil spread.