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Japan follows US lead and slashes key interest rate

Japan’s central bank cut its key interest rate to 0.1 percent yesterday, joining the US Federal Reserve in lowering borrowing rates to nearly zero percent amid a worsening outlook for the global economy.

The move was widely expected and comes after the government earlier in the day said it expected Japan’s economy, the world’s second largest, to shrink 0.8 percent for the fiscal year through March.

The Bank of Japan’s policy board voted 7 to 1 to cut the uncollateralized overnight call rate target from 0.3 percent. It was the second cut in less than two months.

The central bank also introduced new steps to pump more money into the banking system to thaw a growing credit crunch. It plans to start buying commercial paper — the short-term debt firms use to pay everyday expenses — in an effort to funnel cash directly to companies and will increase its purchases of government bonds.

In its most bearish assessment of the economy this year, Bank of Japan cited the harsh impact of tumbling exports, weakening domestic demand and job losses.

“Under these circumstances, economic conditions have been deteriorating and are likely to increase in severity for the immediate future,” it said in its statement.

Japanese shares fell yesterday as investors dumped exporters on a strong yen, while the market shrugged off the Bank of Japan’s expected rate cut, which followed the US Federal Reserve’s move earlier this week to reduce its benchmark rate to a range of zero percent to 0.25 percent — the lowest level on record.

The benchmark Nikkei 225 stock average declined 78.71 points, or 0.9 percent, to 8,588.52. The broader TOPIX index lost 0.5 percent to 834.43.

“A strong yen continued to weigh down on the market, dragging down exporters,” said Yutaka Miura, a senior strategist at Shinko Securities Co Ltd.

The yen traded at 89.03 to the US dollar in Tokyo yesterday, compared with 89.48 in New York late on Thursday. Earlier in the week the yen hit 87.11 to the greenback, the weakest level for the US dollar since July 1995.

The Japanese currency’s surge has triggered strong language on the political front, with government officials dropping hints at possible intervention to limit the yen’s climb and protect Japanese exporters.

Major manufacturers like Toyota Motor Corp and Sony Corp, which are also facing slowing demand overseas, have been cutting employees and slashing production. The Nikkei Shimbun reported that Toyota’s mainstay vehicle operations are likely to post their first loss for the fiscal year through March.
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