BOJ starts 2-day meeting amid speculation of interest rate cut

TOKYO, Dec. 18 Kyodo - The Bank of Japan kicked off its two-day policy meeting Thursday amid growing speculation that it may cut its key interest rate to prop up the country's flagging economy as the yen keeps rising relative to the U.S. dollar.
The BOJ Policy Board meeting comes as the government steps up pressure on the
central bank to take additional measures to provide liquidity in financial
markets and facilitate corporate financing to ward off the fallout from the
global credit crunch.
The bank last cut its target rate for unsecured overnight call money in October
to 0.3 percent from 0.5 percent, the first rate reduction in over seven years.
The speculation of a rate cut has intensified given that credit conditions have
become less accommodating, despite the October rate cut, with companies having
difficulty raising funds in financial markets, analysts say.
The yen's appreciation relative to the U.S. currency has added to such
speculation.
The dollar has fallen to its lowest level in 13 years, in the lower 87 yen
zone, since the U.S. Federal Reserve cut its key interest rate Tuesday from 1
percent to a range of zero to 0.25 percent, a move that surprised market
participants who had expected a smaller reduction.
As a rising yen hurts Japanese exporters, the BOJ has been under growing
pressure from lawmakers to lower interest rates and prevent the yen from
gaining further ground.
Chief Cabinet Secretary Takeo Kawamura told reporters Thursday that he believes
the BOJ will take ''appropriate'' monetary policies. Finance Minister Shoichi
Nakagawa separately said he ''expects (the BOJ) to make the right decision if
(the bank and the government) recognize the current financial conditions.''
But uncertainty remains about whether the central bank will ease credit
conditions, with some senior BOJ officials saying it is necessary for the bank
to ''carefully study'' the effect of its earlier rate cut on the financial
system and on the real economy.
But the BOJ may be unable to resist pressure from the government, which is also
urging it to work out additional measures to support corporate financing.
This pressure has been growing since the bank's closely watched Tankan business
sentiment survey showed Monday that confidence among major Japanese
manufacturers recorded the fastest deterioration in almost 34 years.
The Tankan result was ''very severe,'' BOJ Governor Masaaki Shirakawa told the
Diet Tuesday. He even said the global economy faces the severest conditions
since the Great Depression.
Options the BOJ may explore include the outright purchase of commercial paper,
or short-term corporate debt.
That would help firms raise operating capital at a time when they face
difficulty accumulating funds using commercial paper and other corporate debt
due to the global credit crunch following the bankruptcy in September of U.S.
investment bank Lehman Brothers Holdings Inc.
At present, the BOJ accepts commercial paper only as collateral when lending to
financial institutions on the condition that the institutions repurchase the
debt from the central bank.
Meanwhile, the Fed has introduced direct purchase of commercial paper from U.S.
companies.
==Kyodo