Bank of Japan Cuts Rate to 0.1%

The Bank of Japan cut its benchmark interest rate to 0.1 percent, increased purchases of government debt and announced plans to buy commercial paper for the first time as the deepening recession starves companies of funds.

Governor Masaaki Shirakawa and his colleagues lowered the target for the overnight lending rate from 0.3 percent, the central bank said in a statement today in Tokyo, a decision that was predicted by futures traders after the Federal Reserve reduced U.S. rates this week. Government bonds rallied on the plan to buy more debt.

Purchasing corporate debt and assuming credit risks of companies is an exceptional step taken by a central bank,” the statement said. The decision followed a report this week that showed the sharpest drop in business confidence in 34 years and a surge in the yen to a 13-year high.

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.

The government also decided to purchase commercial paper last week, and today said it would buy as much as 20 trillion yen 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.

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.

Bank of Japan Cuts Rate to 0.1%,
12/19/2008 5:18:37 AM