Japan interest rates return to zero

TOKYO (AP):

Japan's central bank cut its key interest rate to virtually zero in a surprise move Tuesday, and is looking to set up a US$60-billion fund to buy government bonds and other assets as it tries to inject life into a faltering economy.

The Bank of Japan's (BOJ) nine-member policy board voted unanimously to set its overnight call-rate target to a range of zero to 0.1 per cent, returning to zero rates for the first time in more than four years.

The decision underscores growing worries about the Japanese economy, which is being battered by a strong yen and persistently falling prices. The central bank had left rates untouched since December 2008 when it lowered the target to 0.1 per cent.

Recent economic indicators point toward deteriorating exports, industrial production and corporate sentiment. Authorities intervened in currency markets last month to weaken the yen, but the impact was short-lived. Lawmakers repeatedly called on the Bank of Japan for more help.

Three-pronged approach

"Although Japan's economy still shows signs of a moderate recovery, the pace of recovery is slowing down, partly due to the slowdown in overseas economies and the effects of the yen's appreciation on business sentiment," the central bank said in its statement.

The rate cut is the first step of a three-pronged approach outlined by the central bank to answer critics who had disparaged previous efforts as inadequate. It did nothing at its last meeting in early September, which followed an emergency meeting in late August when it expanded a low-interest credit programme.

"It's a good move," said Kyohei Morita, chief economist at Barclays Capital Japan. "All that they announced today is something that is beyond my expectations."

Other analysts agreed. Junko Nishioka, chief economist at RBS Securities Japan, said the central bank "made major progress" Tuesday.

Part two of what the BOJ describes as a "comprehensive monetary easing policy" is a pledge to maintain the zero-rate policy until prices start rising again. That will probably take three or four years, which means rock-bottom rates are here to stay for a while, Morita said.

Japan's last period of zero rates lasted for five years, starting March 2001. Through its "quantitative easing" policy to boost the economy, the central bank flooded markets with excess liquidity to hold short-term interest rates near zero.

The final piece of the central bank's strategy is the creation of a temporary 5-trillion-yen (US$60-billion) fund to purchase financial assets such as government securities, commercial paper and corporate bonds in an attempt to stimulate the economy by lowering longer-term interest rates and risk premiums. About 70 per cent of the fund will be used to buy long-term government bonds and treasury discount bills.