BoJ to dodge zero rates, focus on funding for cos

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Nov 21: Bank of Japan (BoJ) Governor Masaaki Shirakawa indicated that the central bank wants to avoid cutting interest rates to zero and will instead focus on pumping cash into the financial system to buoy the economy. “An additional rate cut would have many adverse effects on the functioning of the money market,'' Shirakawa told reporters after his policy board left the benchmark rate at 0.3% on Friday, three weeks after the first reduction in seven years.

Shirakawa instructed his staff to study new ways of making money available for lending, such as accepting corporate debt as collateral, on concern that businesses are struggling to obtain funds. The bank could be forced to follow the Federal Reserve and the European Central Bank in trimming borrowing costs anyway, should the global financial turmoil prolong Japan's recession.

“Governor Shirakawa's comments strongly reveal that he wants to dodge zero rates and the central bank will seek more ways to add liquidity,” said Seiji Adachi, a senior economist at Deutsche Securities Inc. in Tokyo. “Even so, the bank may be forced to make another rate cut should the economy deteriorate rapidly and other central banks make deeper cuts.”

Reports this week showed the world's second-largest economy slid into a recession last quarter and exports tumbled the most in seven years in October as the global downturn choked sales of automobiles and electronics. Japan will probably shrink this year and next in the first back-to-back contractions in a decade, according to economists surveyed by Bloomberg News.