BOJ Keeps Key Rate at 0.3%

The Bank of Japan held its benchmark interest rate at 0.3 percent and said it will consider pumping more money into the financial system to prop up an economy that fell into a recession last quarter.

Governor Masaaki Shirakawa instructed his staff to study new ways of making money available for lending, such as accepting corporate debt as collateral, the central bank said in a statement in Tokyo today. The unanimous rate decision followed a cut from 0.5 percent last month, the first in seven years.

Shirakawa later indicated that he is reluctant to revive the bank's 2001-2006 policy of keeping rates near zero because further reductions could freeze the money market by making it unprofitable for banks to lend to each other. The central bank could be forced to trim borrowing costs anyway should the global financial turmoil prolong Japan's downturn.

The governor also said businesses are struggling to get funding as the global credit crisis deepens.

Banks are hoarding cash on concern the global recession will cripple companies' capacity to repay debt. The balance of commercial paper, which companies use for short-term funding, fell to 12.8 trillion yen ($135 billion) last month, the lowest since March 2002.

Shirakawa told the central bank to ``swiftly'' look at ``possible changes in the treatment of corporate debt as collateral, as well as possible ways to enhance flexibility in funds-supplying operations collateralized by corporate debt,'' today's statement said.

Shirakawa acknowledged that banks' fund-raising costs had risen even after last month's rate cut. ``It's true that the effect of the latest rates cuts hasn't sufficiently spread through,'' because investors are concerned about the financial health of Japan's commercial banks, he said.

The Tokyo three-month interbank offered rate rose to 0.839 percent today, posting its biggest weekly advance since February 2007. It's 539 basis points higher than the key rate, compared with a 389 basis-point spread before the Oct. 31 reduction.

BOJ Keeps Key Rate at 0.3%, Bloomberg.comGovernor Masaaki Shirakawa instructed his staff to study new ways
11/21/2008 5:04:45 AM