BOJ reverts to zero rates, pledges to buy more assets

TOKYO (Reuters) - The Bank of Japan on Tuesday pledged to pump more funds into the struggling economy and keep rates virtually at zero, surprising markets and stealing a march on the Federal Reserve in providing a fresh dose of economic stimulus.

Bank of Japan Governor Masaaki Shirakawa attends a news conference at the central bank in Tokyo October 5, 2010. REUTERS/Issei Kato

The yen initially fell in reaction to the BOJ news, but later reversed course to be firmer against the dollar than when the BOJ news broke.

For months, the central bank had eschewed government calls for more decisive action, such as buying more government bonds, focusing instead on a limited funding scheme.

But in the face of growing evidence the yen’s strength was hurting the economy, the Bank of Japan carried out what Governor Masaaki Shirakawa described as “comprehensive monetary easing.”

It cut its overnight rate target to a range between zero and 0.1 percent, from 0.1 percent, reinstating the so-called zero-interest policy that the BOJ ended only in July 2006, and it pledged to buy 5 trillion yen ($60 billion) worth of assets.

It said it would keep its benchmark rate effectively at zero until price stability is in sight, adopting a U.S. Federal Reserve-style commitment to ultra-loose policy.

Core consumer prices have been falling from year-earlier levels since early 2009 and the country has been in and out of deflation for about 15 years.

“The latest measures individually may be considered as not having a major effect, but we want to maximize the effect by implementing the steps as a package,” Shirakawa told a news conference, adding that the steps have both the elements of credit easing and an expansion of fund supply.

The asset purchases would roughly match the size of extra stimulus being considered by the government, which is also running out of policy options to lift the economy in the face of public debt that is twice the size of the $5 trillion economy.

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The assets, ranging from government bonds and short-term government securities to commercial paper and corporate bonds, would come under a temporary scheme that would also cover 30 trillion yen of such assets as collateral under an existing loan program.

But analysts were skeptical the measures added up to much.

“The initial reaction was positive, but it’s not clear how they’re going to prevent deflation from intensifying... It’s not clear this will be enough,” said Tim Condon, chief economist and head of research at ING Financial Markets in Singapore.

The skepticism was reflected in markets. After initially weakening to almost 84 per dollar, the yen rebounded to 83.40 by 1006 GMT, firmer than when the BOJ news broke.

The Japanese government bond yield curve steepened, with most yields falling, but 30-year yields rose on disappointment the measures were not more aggressive.

The Nikkei stock average rose 1.5 percent though, its biggest gain in almost three weeks, in the hour and a half of trading that remained following the BOJ announcement.

BOJ policymakers have signaled in past weeks they were considering easing policy further, after Tokyo’s intervention in mid-September to check yen strength offered only temporary relief. After falling, the yen is on the rise again.

Most market players, however, had expected the central bank to opt for a relatively minor adjustment of its 30 trillion yen loan scheme that supplies banks with funds at 0.1 percent rate.


Tuesday’s decision drives the BOJ closer to full quantitative easing it conducted between 2001 and 2006, under which it flooded market systems with excess cash and left markets to decide the overnight call rate.

But on Tuesday the BOJ said it would keep paying 0.1 percent interest on excess reserves held with the central bank, providing a floor for market rates and suggesting it would only temporarily allow rates to fall below 0.1 percent.

“My first impression was that Governor Shirakawa used the phrase ‘comprehensive easing’ instead of ‘quantitative easing’, so I think there is still some negative implication of the previous quantitative easing. He liked to differentiate from the previous easing measures,” said Susumu Kato, chief economist at Credit Agricole in Tokyo.

The decision to cut interest rates was made by a unanimous vote, but board member Miyako Suda opposed the inclusion of government bonds among the types of assets the BOJ could buy using its pool of funds.

Analysts agree the BOJ needs to save its depleted arsenal of policy options in case the economy slips into another recession.

Growth slipped from a healthy annualized rate of 5.0 percent in the first quarter of 2010 to 1.5 percent in the second quarter. Data last week showed exports growth slipped for a sixth straight month in August.

The BOJ is not the only central bank under pressure to do more to support an economy that is showing signs of faltering.

Financial markets expect the Fed to embark upon another round of asset buying to bolster a sluggish recovery as early as its November 2-3 meeting. There are also calls within the Bank of England for further easing, although the bank has kept markets guessing on whether it will indeed do so.

“The BOJ’s decision is in line with the government’s efforts to ensure economic recovery,” Finance Minister Yoshihiko Noda told reporters.

($1=83.45 Yen)

Additional reporting by Stanley White, Tetsushi Kajimoto and Kaori Kaneko; Writing by Tomasz Janowski; Editing by Neil Fullick and Edmund Klamann