The Bank of Japan (BOJ) yesterday surprised markets in adopting a zero-rate policy and announced further easing measures to help safeguard a fragile recovery from the threats of deflation and a strong yen.
The central bank lowered its key rate to a range of between zero and 0.1 percent in its first such move since it set the rate of 0.1 percent at the height of the financial crisis in December 2008.
It also announced an asset purchase scheme in an expansion of its efforts to combat the harmful strength of the yen and beat persistent deflation, having faced -increasing government pressure to do more to boost the economy.
“It was a quite positive surprise,” said Masumi Yamamoto, equity market analyst at Daiwa Securities Capital Market.
“This signaled the Bank of Japan bowed to pressure from the government and took all the possible measures, which may actually create a new concern that the BOJ has no card left to play in its hands,” Yamamoto said.
In a unanimous vote, the central bank said it would “maintain the virtually zero interest rate policy until it judges ... that price stability is in sight.”
It added that it would examine establishing a temporary fund to buy around ￥5 trillion (US$60 billion) in financial assets such as government bonds, commercial paper, corporate bonds and exchange traded funds.
The central bank had earlier expanded a loan scheme enabling banks to borrow a total of ￥30 trillion from the central bank for a maximum of six months against pooled collateral.
“Although Japan’s economy still shows signs of 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,” it said.
The benchmark Nikkei share index jumped by about 1 percent on the surprise decision and closed up 1.47 percent. The headline Nikkei index ended at 9,518.76, up 137.70 points. The Topix index of all first section shares on the Tokyo Stock Exchange gained 1.20 percent, or 9.90 points, to 832.64.
The yen weakened to ￥83.99 against the US dollar from ￥83.55 earlier, before strengthening back to around ￥83.70.
“The central bank decided on easing measures on a scale and rate much bigger than the market had expected,” said Hideaki Inoue, chief forex manager at Mitsubishi UFJ Trust and Banking Corp.
However, he added the greenback’s gains were capped as markets also expect the US Federal Reserve to adopt further easing measures to shore up the US economy, which would soften the US dollar and complicate efforts to weaken the yen.
Japan stepped into the currency markets last month for the first time since 2004 in a bid to stem the yen’s strength after it hit a 15-year high against the US dollar and has repeatedly warned it is ready to do so again.
The strong yen has hurt exporters, making their goods more expensive and eroding companies’ overseas profits when repatriated.
Exports, a crucial driver for Japan’s growth, expanded at their slowest pace this year in August, as the impact of the yen’s strength and austere belt-tightening on overseas demand illustrated the risks threatening recovery.
Japan’s economy expanded by an annualized 1.5 percent in the period between April and June, sharply lower than the previous quarter’s 5 percent.
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