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Saturday, Nov. 1, 2008

BOJ lowers its key lending rate to 0.3%

Staff writer

The Bank of Japan cut its benchmark interest rate Friday to 0.3 percent from 0.5 percent, joining other central banks in moving to limit further damage from the global financial crisis.

News photo
Masaaki Shirakawa KYODO PHOTO

The BOJ will also start paying interest on excess reserve balances lenders deposit at the central bank.

In addition, the BOJ lowered its economic growth forecast to 0.1 percent for this fiscal year from an earlier projection in April of 1.5 percent.

The rate cut by the BOJ was its first since March 2001, when the bank introduced its so-called quantitative easing policy, under which it flooded the financial system with liquidity to drive the interest rate for unsecured overnight call money to near zero.

The BOJ Policy Board meeting was split 4 to 4 over a proposal to cut the rate by 0.2 point, as three members called for a cut of 0.25 percentage point and another voted to maintain the 0.50 rate.

BOJ Gov. Masaaki Shirakawa cast the deciding vote in support of a 0.2 point cut, according to the central bank.

"Adjustments in the world economy stemming from financial crises in the United States and Europe have further increased in severity," the BOJ said in a statement.

"Under these circumstances, increased sluggishness in Japan's economic activity will likely remain over the next several quarters with exports leveling off and the effects of earlier increases in energy and materials prices persisting," it said.

The rate cut had been widely expected and its purpose is seen as a symbolic expression of the BOJ's intention. Experts welcomed the BOJ's move, saying it could help prevent the yen from rising sharply against other currencies, and stock prices from plunging.

Share prices on the Tokyo Stock Exchange, however, fell 5 percent, or 452.78 points, from Thursday as the Nikkei average closed at 8,576.98.

"Since I myself thought an interest rate cut was necessary, I can sufficiently evaluate" the latest cut, said Takeshi Minami, an economist at Norinchukin Research Institute.

"I foresee both domestic and overseas economies will further worsen, and the upside risk of commodity prices is almost eliminated," Minami said.

Takahide Kiuchi, chief economist of Nomura Securities Co., also praised the BOJ.

"If the BOJ did not cut rates, the interest rate gap (between Japan's and those overseas) will shrink, the yen will rise further and stock prices will be lower," Kiuchi said. The latest rate cut "will indirectly be a plus for the economy."

Kiuchi even predicted the rate will be reduced to zero toward the end of this fiscal year, when the Fed is expected to cut its rates further.

According the BOJ, consumer price inflation is also likely to decline gradually, reflecting the recent fall in commodity prices, the central bank said, adding, however, that the economic activity bears downside risks.

At the monetary policy meeting, "the bank judged that a reduction in policy interest rates and a further increase in the flexibility of money market operations are necessary to maintain accommodative financial conditions," the BOJ said.

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The Japan Times

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