Bank of Japan keeps rate steady, raises bond buys

[March 18, 2009]  TOKYO (AP) -- Japan's central bank kept its benchmark rate steady and boosted its purchase of government bonds Wednesday to keep ample cash in the monetary system as the nation grapples with a debilitating global slowdown.

The Bank of Japan has little room left to go on standard monetary policy, such as lowering interest rates, with its benchmark interest rate already close to zero. Wrapping up a two-day meeting, the bank's board voted unanimously to keep its key overnight call rate at 0.1 percent.

That compares with the U.S.'s targeted range of between zero and 0.25 percent and the euro-zone's 1.5 percent.

The Bank of Japan also raised its monthly government bond purchase to 1.8 trillion yen ($18.3 billion) from the previous 1.4 trillion yen, effective this month.

Late Tuesday, the bank said it is considering providing loans to commercial banks in an effort to shore up their capital base and encourage banks to lend themselves. Analysts said the move, if adopted, would be unusual for central banks. It is still unclear what the central bank's final plan might be.

"The options left for what the Bank of Japan can do are limited, and so it has decided to carry out what it can do," said Yasuo Yamamoto, economist at Mizuho Research Institute in Tokyo.

Bank of Japan Gov. Masaaki Shirakawa said much of the problem of financing for major companies ahead of the closing of the fiscal year later this month was fixed, but money shortages were likely to drag into the coming fiscal year, threatening the health of the economy.

"The difficult financial conditions are expected to continue," Shirakawa told reporters at a press conference. "We decided it was crucial to continue to aggressively provide ample cash to ensure stability in the financial system."

Investors were encouraged by the bank's efforts, and the benchmark Nikkei 225 index climbed for a fourth day, rising 0.3 percent to 7,972.17closing Wednesday up 0.29 percent.

"Investors took heart from the bank's moves. The Bank of Japan is not sitting still. It is taking action aggressively to ensure the smooth liquidity in the financial market," said Masatoshi Sato, strategist at Mizuho Investors Securities Co.

Other central banks are resorting to unusual moves to cope with the continuing global crisis. The Bank of England, which earlier this month cut rates to its lowest ever level of 0.5 percent, has announced a 75 billion pound ($103.6 billion) plan to buy assets, such as government securities and corporate bonds.

The Federal Open Market Committee, the Federal Reserve's policymaking body, is also meeting this week, and it remains to be seen what additional measures it might take with rates basically at zero.

The Bank of Japan expressed deep concerns about the economy, battered by declining exports and weakening domestic demand as corporate profit drops and unemployment rises.

"Under these circumstances, economic conditions have deteriorated significantly and are likely to continue deteriorating for the time being," it said in a statement.

But it said it expects the Japanese economy to start recovering by the latter half of fiscal 2009, which runs through March 2010.

The central bank acknowledged the capital strength of Japanese financial institutions may be hurt by the prolonged slump in the world's second-largest economy as well as massive losses on securities.

The central bank already buys commercial paper, corporate bonds and stocks from financial institutions to help shore up their balance sheets.

Most Japanese companies' fiscal year ends March 31, and fears are growing bankruptcies and unemployment could rise in coming weeks. Gross domestic product fell at a 12.1 percent annual rate in the October-December quarter -- the worst drop since the oil shock of 1974 and double the pace of the recent decline in the U.S.

[Associated Press; By YURI KAGEYAMA]

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