Japan slashes interest rates to 0.1%

The Bank of Japan today cut interest rates to 0.1% in another attempt by central banks around the world to drag the global economy out of recession.

The bank’s eight board members voted 7-1 to lower the basic lending rate from 0.3% to 0.1%, following a cut from 0.5% to 0.3% at the end of October.

The decision comes days after the US Federal Reserve voted for record low interest rates of between zero and 0.25%. This month the Bank of England slashed interest rates to 2%, their lowest level in 57 years, and is reportedly considering another cut when its board meets next month.

The central bank governor, Masaaki Shirakawa, described the decline in the global economy as “the most rapid in our lifetime” and said he could not rule out further cuts.

However, Shirakawa said the decision to cut rates and buy more assets to give firms easier access to funds did not mark a return to quantitative easing, a policy it pursued for five years from 2001 under which it flooded the banking system with huge sums of money to promote lending.

“No one on the bank’s board seems to think that boosting base money would stimulate the economy,” he told reporters.

Concern is mounting that the rise of the yen, which last week reached a 13-year high against the dollar, would continue to batter Japanese exports and corporate earnings. Car and electronics makers have slashed output and profit forecasts as consumers around the world choose to hold on to what little cash they have. Though there was no return to quantitative easing, the bank said it would ease the pressure on corporate funding, as the government warned the world’s second-biggest economy would register zero growth in fiscal 2009.

The cabinet office said it expected gross domestic production through to next March to contract by 0.8%, having forecast growth of 1.3% in July.

The government said negative growth could be avoided by a moderate recovery in consumer spending as a result of two recently unveiled stimulus packages.

In a statement, the BoJ admitted global financial conditions had “deteriorated sharply”.

It said weak exports and a decline in domestic demand, as well as worsening unemployment, had prompted it to act. “Under these circumstances economic conditions have been deteriorating and are likely to increase in severity for the immediate future,” it said.

“Given the slowdown in overseas economies and the turmoil in global financial markets, it will likely take some time for the necessary conditions for Japan’s economic recovery to be satisfied.”

The bank said it would keep a close watch on the economies of Europe and the US, and expected Japanese banks to “take full advantage” of the rate cut in its lending practices, warning that “pressures acting to depress economic activity from the financial side may become more marked”.

The BoJ said it would help firms gain access to new funds by increasing its outright purchase of Japanese government bonds to ¥1.4 trillion (£10.3bn) per month from ¥1.2tn, and temporarily buying commercial paper – a form of short-term unsecured borrowing – outright.

The finance minister, Shoichi Nakagawa, welcomed the cut but echoed the bank’s gloomy predictions about the economy.

“I think the BOJ made its decision based on an earnest assessment of the economic and financial situation,” he told reporters. “Looking at employment and companies’ financial conditions, in a broad sense the economy is in a very severe state.”

Analysts said the bank, which until recently was reluctant to take part in concerted rate cuts, had been left with little option given the strength of the yen and the Fed’s huge rate reduction on Tuesday.

Today’s move, however, will fuel speculation the BoJ will make further rate cuts to bring the economy back from the brink of collapse.

“The BoJ seems to have taken all the possible policy options that had been lurking,” Hideo Kumano, chief economist at Dai-ichi Life Research Institute, told Reuters.

“It was certainly better than doing nothing. But this won’t stop the yen’s rising trend, although it could stop the yen’s advance temporarily.”

Others have not ruled out a return to quantitative easing, a policy it promoted for five years from 2001 under which it flooded the banking system with huge sums of money to promote lending.

The crisis engulfing Japan’s exporters was underlined today when the daily Nikkei business newspaper said Toyota’s mainstay vehicle operations are likely to post their first loss in the financial year ending next March.

Justin McCurry in Tokyo
Friday 19 December 2008 10.37 GMT

Source: The Guardian