Thursday, December 18, 2008

Japan Breaking News - BOJ cuts rates to .1%

Competitive ZIRP, it's a race to the bottom. Rate cut is meaningless, but buying of commercial paper is more of the same long term market destroying crap:
- To start outright purchase of commercial paper

Bloomberg Update:
Dec. 19 (Bloomberg) -- The Bank of Japan cut its benchmark interest rate to 0.1 percent and said it would buy corporate debt as a deepening recession chokes off funding for businesses.

Governor Masaaki Shirakawa and his colleagues lowered the target for the overnight lending rate from 0.3 percent in a 7- to-1 vote, the central bank said in a statement today in Tokyo. The bank will buy commercial paper temporarily and increase its monthly purchase of government bonds.

The central bank’s second reduction in two months came after the Federal Reserve this week cut its target rate as low as zero, driving the yen to a 13-year high against the dollar. The Bank of Japan’s move to buy corporate debt is designed to ease the cost of borrowing for Japanese companies struggling to obtain financing amid a global credit crunch.

“Whereas the Fed is dramatically expanding its balance sheet to offer support to financial institutions, the Bank of Japan is now expanding its balance sheet to support the corporate sector,” said Glenn Maguire, chief Asia-Pacific economist at Societe Generale SA in Hong Kong.

The yen traded at 89.17 per dollar as of 2:56 p.m. in Tokyo from 89.28 shortly before the decision. Bonds rose, reversing earlier declines, sending the yield on the 10-year bond down 3.5 basis points to 1.225 percent. The Nikkei 225 Stock Average slid percent and has lost 44 percent this year.

Share Purchases

The government also decided to purchase commercial paper outright last week, and today said it would buy as much as 20 trillion yen ($223 billion) of shares held by banks to boost their capital.

Prime Minister Taro Aso and Finance Minister Shoichi Nakagawa said over the past week they wanted the bank to play its part in adding cash to the economy to help companies borrow. Commercial paper markets this month touched the highest in at least the past four years.

Tadao Noda was the sole board member to oppose today’s rate decision. Shortly before the announcement, investors saw a 50 percent chance that the central bank would lower the key rate, according to calculations made by JPMorgan Chase & Co. based on interest-rate swaps trading.

The central bank said it will raise its monthly government bond purchases from lenders, its main tool for adding funds into the banking system, to 1.4 trillion yen ($15.6 billion) from 1.2 trillion yen, the first increase since October 2002. It will broaden the range of debt it buys to include 30-year, floating- rate and inflation-indexed bonds.

Economy ‘Deteriorating’

The policy board cut its assessment of the economy, saying “conditions have been deteriorating and are likely to increase in severity.” In November, it said growth had become “increasingly sluggish.”

The global economy is in the worst state since the Great Depression, intensifying the risk for a prolonged slump in Japan, Shirakawa told parliament on Dec. 16.

“Japan’s economy has declined at an unprecedented pace in the current quarter,” said Jun Ishii, chief fixed-income strategist at Mitsubishi UFJ Securities Co. in Tokyo. “In particular, the auto industry, which widely affects other sectors and is vital for economic growth, is heading for a decline.”

The Fed’s reduction brought the U.S. key rate lower than Japan’s benchmark for the first time since 1993, making the yen a higher-yielding currency. The Japanese currency has gained 25 percent this year, eroding profits for exporters that are already cutting jobs, production and spending as global demand collapses.

‘Swift Action’

Honda Motor Co. cited the yen’s gains and slumping sales as reasons for slashing its full-year profit forecast by 62 percent this week. President Takeo Fukui described the currency’s level of around 89 yen to the dollar as “abnormal” and called on the government and central bank to take “swift action.”

Confidence among Japan’s major manufacturers fell the most in 34 years, the central bank’s quarterly Tankan survey showed this week, indicating the first recession since 2001 is likely to deepen.

The world’s second-largest economy could shrink 0.8 percent next fiscal year if the government doesn’t implement stimulus measures, Economic and Fiscal Policy Minister Kaoru Yosano said today. The Cabinet Office today predicted zero growth for the year starting April 1.

To contact the reporter on this story: Mayumi Otsuma in Tokyo at

Last Updated: December 19, 2008 00:59 EST