Bank of Japan Announces Several Steps to Ease Credit Conditions

December 19, 2008

Actions announced by the BOJ to alleviate credit strains and counteract a rapidly deepening recession went beyond what the market had been anticipating but are not surprising against the backdrop of other central banks recently getting ahead of the curve of market expectations with big rate cuts. Japan is grappling with one unique problem, a soaring yen, along with many other risks common to most economies. The actual rate cut of 20 basis points in the overnight uncollateralized call money rate is small by recent standards, and officials tried hard not to convey that full quantitative easing has returned. Governor Shirakawa’s press conference adopted a less dovish tone than the statement released today by the Bank of Japan. The statement revealed that the vote to cut interest rates had one dissenter, Tadao Noda, and Shirakawa implied that follow-through further easing would not be imminent, although he would not rule out the possibility of more easing down the road. In taking today’s actions, the Bank of Japan downgraded its economic assessment.

This was the second easing by the Bank of Japan, following a 20-bp rate cut to 0.3% on October 31st. The steps to be taken now are

  1. A cut to 0.1% from 0.3% in the overnight money target.
  2. A cut to 0.3% from 0.5% in the so-called Lombard rate.
  3. Agreement to set a spread of zero between the uncollateralized overnight call rate target and the rate applied under the Principal Terms and Conditions of the Complementary Deposit Facility.
  4. Raising monthly outright buying of government bonds to Y 1.4 trillion from the prior amount of Y 1.2 trillion.
  5. Expansion of the range of acceptable JGB’s in that program.
  6. Introducing special funds-supplying operations to facilitate corporate financing.
  7. Introducing outright purchases of commercial paper as a temporary measure and launching an investigation to develop other corporate financing instruments.
  8. Including the Development Bank of Japan as a counterparty in such operations.

Japanese bond yields closed lower as one would have expected. But the yen rose, and stocks fell, which were not reactions that officials had sought.



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