Japan's central bank keeps interest rate unchanged

[April 07, 2009]  TOKYO (AP) -- Japan's central bank kept its benchmark interest rate steady Tuesday but introduced new steps to spur lending and ease the strains of an increasingly painful recession.

The Bank of Japan's eight-member policy board voted unanimously to leave the key overnight call rate target unchanged at 0.1 percent, as widely expected.

With interest rates close to zero, the central bank has little room to tweak regular monetary policy and has instead focused on less conventional measures to boost corporate financing, which has contracted amid the global credit crisis.

The central bank already buys commercial paper, corporate bonds and stocks from financial institutions to help shore up their balance sheets, but it acknowledged that "financial conditions have remained tight on the whole."

In its latest move, the BOJ expanded the range of collateral it accepts in an effort to funnel more funds to commercial banks and subsequently, to companies seeking loans. The bank, for example, said it now welcomes "loans on deeds to municipal governments as eligible collateral."

The transition to a new fiscal year, which began April 1, has so far been upbeat with stock prices rising on nascent expectations for a recovery in overseas economies.

The BOJ, however, is "not in a position to let its guard down," said Kyohei Morita, chief economist at Barclays Capital in Tokyo.

"Earnings season is expected to be severe and some companies could face ratings downgrades," he said. "If so, banks and other lenders will see a further rise in credit costs. Indeed, financial institutions themselves could be subject to downgrades."

Still, the collateral expansion is a relatively minor modification to the bank's arsenal. The BOJ's restraint from a major policy announcement suggests that board members may be awaiting new economic cues before they decide what to do next.

The central bank kept its core assessment of the economy largely unchanged, saying it has "deteriorated significantly," though it noted some glimmers of hope in recent data.

"The pace of decline in exports and production is expected to moderate ... but economic conditions are likely to continue deteriorating for the time being due to a further weakening in domestic private demand," BOJ Gov. Masaaki Shirakawa told reporters.

Pummeled by a debilitating global slowdown, the world's second-largest economy is mired in its deepest recession since World War II amid a collapse in overseas demand for its cars and gadgets. A quarterly central bank business survey last week showed that confidence among big manufacturers has plunged to its lowest point ever.

Major exporters like Toyota Motor Corp. and Sony Corp. have warned investors that they would fall into the red for the year ended March 31.

To stem the damage, Prime Minister Taro Aso on Monday ordered 10 trillion yen ($99.3 billion) in fresh public spending, an amount equivalent to about 2 percent of gross national product.

Lawmakers last month passed a record 88.5 trillion yen budget for the fiscal year that started April 1, which included parts of Aso's two previous stimulus packages. His latest plan consists of steps to help contract workers and small businesses, boost regional economies, expand "green" technologies and support elderly care.

The BOJ said it expects Japan's economy to start recovering toward the end of this fiscal year, "with price declines abating as global financial markets regain stability and overseas economies move out of their deceleration phase."

Japan's interest rates are among the lowest of major economies. The Federal Reserve's targeted range hovers between zero and 0.25 percent, while the European Central Bank last week trimmed its benchmark rate to 1.25 percent.

Separately, the Bank of Japan, European Central Bank, Bank of England and Swiss National Bank said Monday they will enter into swap arrangements to provide foreign exchange liquidity to the U.S. Federal Reserve if needed.

[Associated Press; By TOMOKO A. HOSAKA]

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