BOJ cuts rates and pumps funds against crunch

BOJ Governor Masaaki Shirakawa declined to rule out further cuts, and analysts said a reluctant central bank might well be forced to do more.

Friday's move took the BOJ's overnight call rate, at which it lends to financial institutions, to its lowest level since July 2006, when it ended its zero rate policy.

A dramatic rate cut by the Federal Reserve on Tuesday, which took U.S. rates below Japan's, and the yen's subsequent rise to a 13-year high against the dollar, had ratcheted up government pressure for BOJ action to help an economy already in recession.

The dollar rose briefly against the yen but quickly gave up its gains while Tokyo share prices temporarily turned positive but slipped on profit-taking.

Japanese government bonds advanced, with the benchmark 10-year yield briefly hitting a 3- year low.

Calling the economic turmoil of the past few months "the most rapid in our lifetime," Shirakawa told a news conference he could not rule out further rate cuts.

He said the decision to cut rates and buy more assets did not mark a return to a quantitative easing policy, the final option of any central bank in which the financial system is awash with cheap funds to try to revive lending.

"No one on the BOJ board seems to think that boosting base money would stimulate the economy," Shirakawa said.

NO GUARANTEES ON ECONOMY
The main decision by the BOJ board was by a vote of 7-1.

Despite reluctance to revive a controversial quantitative easing stance ended in 2006, the BOJ might well be pushed to take that step after moving to near-zero rates early next year, analysts said.

"... there is still no guarantee that the announced steps will be able to stop the economy from collapsing," said Hideo Kumano, chief economist at Dai-ichi Life Research Institute.

Japan's government forecast earlier on Friday that the economy would not grow in the fiscal year from April 1, although a slew of stimulus packages would keep it from contracting. The government acknowledged, though, that Japan's recovery might be delayed if global conditions worsened.

The Bank of Japan also lowered its assessment of the economy, saying conditions would likely worsen in the near-term.

Besides cutting the overnight call rate, the BOJ sliced its Lombard rate, at which banks can borrow directly from the central bank, to 0.3 percent from 0.5 percent.

Cutting the Lombard rate could ease money market strains as it sets a ceiling for call rates and other interbank rates.

To smooth fund supply, the BOJ decided to raise the amount of Japanese government bonds it buys each month to 1.4 trillion yen from 1.2 trillion yen, and purchase a wider type of bonds.

It also decided to temporarily buy commercial paper outright, following in the footsteps of the U.S. Federal Reserve, despite strong reservations expressed by BOJ officials in the past about accepting such assets with credit risk.

Commercial paper is a form of short-term unsecured borrowing often used by companies to fund day-to-day operations.

RECESSION BITES
The global credit crisis has seized up the commercial paper market, forcing many Japanese companies to boost borrowing from banks at a record pace as they set aside cash at the year-end, when demand for funds tightens.

The Bank of Japan already accepts commercial paper as collateral in its fund operations but had been hesitant to directly purchase them.

The central bank last cut its key policy rate to 0.3 percent from 0.5 percent in October and unveiled a series of measures to ease credit strains as the fallout from the global financial turmoil spread.

Japan, like the United States, is already in recession, with companies such as carmakers Toyota and Honda slashing output and profit forecasts as customers close their wallets worldwide.

Adding to the pain, the Fed's rate cut had triggered a sharp yen rally with U.S. interest rates, at 0-0.25 percent, falling below Japan's 0.3 percent for the first time since February 1993.

The government warned currency markets on Thursday of possible intervention to stem the yen's rise, which erodes the value of profits Japanese firms earn overseas, adding to pressure on the BOJ to support the export-dependent economy.