The Bank of Japan pledged to keep its benchmark interest rate at “virtually zero” until deflation has ended after unexpectedly reducing borrowing costs for the first time since 2008 and expanding its balance sheet.
The bank cut the overnight call rate target to a range of 0 percent to 0.1 percent, the lowest level since 2006, from 0.1 percent, it said in a statement in Tokyo. Policy makers will set up a 5 trillion yen ($60 billion) fund to buy government bonds and other assets, inflating the balance sheet at a time when U.S. and U.K. central bankers are contemplating similar moves.
Japan’s stocks climbed after the announcement, which countered economists’ forecasts for the central bank to instead enlarge a bank-loan program. Today’s move, labeled “comprehensive monetary easing” by Governor Masaaki Shirakawa and his colleagues, still falls short of a wider expansion of debt purchases sought by some politicians.
“With today’s decision, the Bank of Japan paved the path for the next step,” said Junko Nishioka, chief economist at RBS Securities Japan Ltd. in Tokyo. “What will be critical will be how foreign-exchange rates move as a result,” along with the impact of any additional easing by the Federal Reserve, she said.
Policy makers kept their credit program for banks at 30 trillion yen, against the prediction of 14 of 17 economists surveyed by Bloomberg News.
The bank also kept the target for monthly purchases of government bonds at 1.8 trillion yen. The statement said the debt bought through the new facility won’t be considered as applying to the BOJ’s rule for keeping its holdings at less than the value of banknotes outstanding.
Shirakawa told a post-meeting news conference today that the bank will consider expanding the fund “if necessary,” and wouldn’t rule out buying more types of assets. The governor said the decision to cut the rate was to meant to be an “explicit” message that the bank will allow the target to decline below 0.1 percent because of the added liquidity injections.
The Nikkei 225 Stock Average ended 1.5% higher. The yen recouped its losses about four hours after falling on the BOJ’s decision. It traded at 83.35 yen to the dollar at 5:38 p.m. in Tokyo compared with 83.57 before the announcement.
Step Up Efforts
Business leaders have urged authorities to step up efforts to shield exports from the yen’s surge last month to a 15-year high. Authorities intervened last month for the first time since 2004, selling 2.12 trillion yen to stem the exchange rate’s gains. The yen’s advance prompted Nintendo Co., the world’s biggest maker of video-game machines, to cut its annual net profit forecast by 55 percent to 90 billion yen last week.
“Today’s moves may help push down short-term rates, which could help halt the yen’s gains,” said Susumu Kato, chief economist for Japan in Tokyo at Credit Agricole CIB and CLSA.
The BOJ said it will keep the “virtually interest rate policy” until it decides that “price stability is in sight,” a stance it termed its “policy time horizon.” The BOJ board considers prices stable when they are in a positive range of up to 2 percent, with a median of 1 percent.
The bank said its new 5 trillion yen fund will buy about 3.5 trillion yen in government debt and the remainder will be used to purchase assets such as commercial paper, exchange traded funds and real estate investment trusts.
Central banks around the world are weighing the need for more stimulus as growth cools. Chairman Ben S. Bernanke said this week the Fed’s large-scale asset purchases improved the economy and further buying is likely to help more. The European Central Bank stepped up its government-bond purchases last week.
While the Bank of England is forecast to keep its stimulus program at the current level this week, policy maker Adam Posen has advocated an expansion.
The measures widen the Bank of Japan’s arsenal of tools beyond the 30 trillion yen credit program, which extends funds to banks at 0.1 percent. That facility had failed to halt a contraction in credit, and only about 20.8 trillion of the resource has been used so far, according to money-market brokerage Tokyo Tanshi Co.
Japan introduced the zero rate policy for the first time in 1999 and again in 2001, when it also adopted so-called quantitative easing, or targeted injections of funds into the economy.
“The BOJ completely changed its stance,” said Seiji Shiraishi, chief economist at HSBC Securities in Tokyo, one of two analysts in the Bloomberg survey who predicted a rate cut at today’s meeting. “Today’s move showed that the bank is absolutely committed to address downside risks. They are in a full fighting mode.”
Recent reports provide evidence the yen’s strength is hindering economic growth.
Industrial production unexpectedly declined for a third month and gains in retail sales were smaller than economists forecast, government figured released last week showed. The overall economy grew at less than half the pace in the April-June period compared with the previous quarter.
Further signs of weakening may emerge in coming weeks.
Japan’s economy will probably contract in the fourth quarter because the government’s incentives to subsidize energy- efficient cars expired in September and increased consumer spending due to an unusually hot summer will wane, said Masaaki Kanno, a former BOJ official and now chief Japan economist at JPMorgan Chase & Co. in Tokyo.
Domestic new car sales in September fell for the first time in 14 months, the Japan Automobile Dealers Association said on Oct. 1. The government ended the subsidy program in the middle of the month because its budget ran out.
Governor Shirakawa said today it has become more likely that the economy’s return to sustainable growth “will be delayed” a stronger yen and a slowdown in the global economy have been hurting corporate sentiment and weakening the recovery, he said.
Politicians had been calling for bigger steps from the central bank.
“Without the help of policy easing by the BOJ, the yen would come back to regain strength no matter how much Japan intervenes in the currency market,” said Keiichiro Asao, policy research chief of the opposition Your Party, said in an interview on Oct. 1.
Your Party is preparing a bill to revise the Bank of Japan Law to give the government a bigger role in central bank policy making, including possibly setting an inflation target together with the BOJ. It aims to submit the bill to the current parliament session.
Finance Minister Yoshihiko Noda told reporters today he welcomed the BOJ’s decision. “I hope that this will help stabilize the foreign-exchange market,” he said.