THE Bank of Japan's interest rates may be headed back to zero.
Governor Masaaki Shirakawa and his board on Friday cut the key overnight lending rate by 20 basis points to 0.3 percent, abandoning a two-year struggle to raise the lowest borrowing costs among major economies, Bloomberg News reported.
Three of the eight members argued for a deeper cut of 25 basis points and one wanted no change.
"We are headed back to a zero-interest-rate world," said Tomoko Fujii, head of economics and strategy at Bank of America Corp in Tokyo.
Should interest rates return to zero, the Bank of Japan may not be alone. Federal Reserve Bank of San Francisco President Janet Yellen said last week that the United States central bank may cut the benchmark rate close to zero from 1 percent level if the economy remained weak.
Shirakawa, 59, cast the deciding vote on Friday after the board was evenly split for the first time since the central bank gained its independence from the government 10 years ago.
The Bank of Japan would do its utmost to get the economy growing again "through maintaining accommodative financial conditions," it said in a statement accompanying the reduction decision.
Hiromichi Shirakawa, chief Japan economist at Credit Suisse Group in Tokyo, said this language suggested the bank would keep rates low until the global economy picked up.
"It'll be very difficult for the Bank of Japan to avoid reintroducing the zero-rate policy," said Shirakawa, who used to work at the central bank, but is no relation to the governor. "The question is only when." The bank's twice-yearly outlook issued on Friday may partly explain the reason for the reduction in lending rates.
Inflation concerns
Inflation may fall back to 0 percent next fiscal year, the bank predicted. It also slashed its growth forecast for the year ending March to 0.1 percent from 1.2 percent in July.
"The BOJ thinks we're going to go back into deflation," said Richard Jerram, chief economist at Macquarie Securities Ltd in Tokyo. "You shouldn't have been raising rates until you were confident that you weren't going to go back into deflation."
A zero-rate policy prevailed in Japan for five years until July 2006 as the bank tried to end the deflation that followed the bursting of the bubble economy in the early 1990s.
From March 2001 until March 2006, the bank combined zero rates with a so-called quantitative-easing policy of increasing money in the accounts held by commercial banks. That measure isn't likely to be repeated.
If the economy deteriorated and the central bank needed to provide extra funds, it may consider alternative means to those used under quantitative easing, said Takehiro Sato, chief Japan economist at Morgan Stanley in Tokyo.
The bank may need to expand the range of collateral it accepts from lenders in exchange for loans, step up government bond purchases from banks from the current 1.2 trillion yen (US$12 billion) a month, and purchase commercial paper and corporate debt to improve companies' access to cash, Sato said.
The BOJ bought about 2 trillion yen in shares held by banks between 2002 and 2004 to protect lenders' capital from being depleted by slumping stock prices.
The central bank started selling its stake two years ago, though it halted the sales last month as Japanese stocks joined the global tumble.