Bank of Japan reverts to zero rates in surprise move

Tokyo: The Bank of Japan on Tuesday 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 signalled 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 yen (60 billion dollars) in financial assets such as government bonds, commercial paper, corporate bonds and exchange traded funds.

It had earlier expanded a loan scheme enabling banks to borrow a total of 30 trillion yen 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 around 1.0 percent on the surprise decision, and closed up 1.47 percent. The yen weakened to 83.99 against the 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.

But 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 dollar and complicate efforts to weaken the yen.

Japan stepped into the currency markets in September for the first time since 2004 in a bid to stem the yen’s strength after it hit a 15-year high against the dollar, and has repeatedly warned it is ready to do so again.

The central bank last week said that its quarterly Tankan survey of business confidence was expected to take a pessimistic view of economic conditions by the end of the year as Japan’s recovery weakens.

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.

A strong domestic currency also makes imports cheaper, helping prolong a damaging deflationary cycle where consumers hold off on purchases in the hope of further price drops, clouding future corporate investment.

Japan’s economy expanded by an annualised 1.5 percent in the April-June period, sharply lower than the previous quarter’s 5.0 percent.