The Bank of Japan (BOJ) cut its super-low interest rates yesterday for the first time in seven years, warning that Asia’s largest economy will barely grow this year because of the financial crisis.
The BOJ joined a rate-cutting campaign by central banks around the world, reducing its key lending rate by 20 basis points to 0.3 percent to try to calm volatile markets and ward off a deep recession.
But investors appeared unimpressed. Tokyo’s Nikkei index tumbled 5 percent in the wake of the cut, which was slightly smaller than markets had expected.
PHOTO: AFP
The final decision was taken by BOJ Governor Masaaki Shirakawa as the policy board was evenly split on whether to support the move.
The BOJ also decided to start paying interest on commercial bank reserves held on account as part of efforts to ease pressure in the money market.
The bank said that the fallout from financial crises in the US and Europe had become more severe.
“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.
It was the first interest rate cut by the Japanese central bank since March 2001, when it introduced an unprecedented policy of almost free credit to try to pull the economy out of the deflationary doldrums.
The Japanese economy shrank in the second quarter of this year and a slew of gloomy economic data since then has reinforced fears of a prolonged downturn.
The BOJ slashed its economic outlook, predicting tepid growth of 0.1 percent in the current fiscal year to March and 0.6 percent next year.
“The Japanese economy is still in the early stages of tough times as exports are expected to start declining from now on,” said Masahiko Hashimoto, an analyst at Daiwa Institute of Research.
“The expected export slump will squeeze corporate earnings and then hit household spending and the job market,” Hashimoto said.
Central banks in the US, China, Hong Kong and Taiwan have lowered borrowing costs this week as part of efforts to avert a financial meltdown.
Speculation is growing that the European Central Bank and the Bank of England could announce fresh interest rate cuts next week.
But analysts said the rate cut in Japan would be largely symbolic as borrowing costs were very low even before the cut.
“Unlike the United States and Europe, where rates have already been reduced, a rate cut in Japan will probably do little to stimulate the economy,” said professor Teizo Taya of Rikkyo University, a former member of the BOJ board.
Until a few months ago the Bank of Japan had been eyeing an interest rate hike, but worries about inflation have since been replaced by fears of a deep global recession because of the credit crunch.
Japanese inflation slowed to 2.3 percent in September from a decade high of 2.4 percent in August, official figures showed yesterday.
Unemployment slid to 4 percent in September from 4.2 percent in August, but the drop was mainly attributed to a shrinking work force. Housing spending fell 2.3 percent from a year earlier, down for a seventh straight month.
“Japan probably is already in recession,” said Eisuke Sakakibara, a former top finance ministry official who earned the nickname “Mr Yen” for his influence over currency markets.
“This is a simultaneous, worldwide recession, which could [last] for quite a long time,” said Sakakibara, now a professor at Waseda University.
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