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BOJ further eases credit conditions.

TOKYO, Feb. 28 Kyodo


The Bank of Japan (BOJ) further eased its monetary grip on Wednesday with cuts in the key short term interest rate and the official discount rate, as the central bank acknowledged deflationary pressure in Japan and became more cautious about the deteriorating domestic economy.

The BOJ said it will reduce the closely watched target rate for unsecured overnight call money lending by 0.10 percentage point to around 0.15%.

This marked the first cut in the key short-term rate since Aug. 11 when the central bank decided to terminate the policy of guiding the call money rate to near zero.

The BOJ also said it will lower the official discount rate by 0.10 point to a record low of 0.25%, effective Thursday, following a 0.15 point cut on Feb. 13. Prior to that, the rate had stood at 0.50% since September 1995.

The official discount rate is a fee charged by the BOJ on its loans to commercial banks.

BOJ Governor Masaru Hayami said the decisions were made because of increasing uncertainty over the outlook for the Japanese economy and concern over price falls.

''The pace of ongoing economic recovery in Japan has been slowing further against the background of deceleration of overseas economic growth and declines in domestic stock prices, and uncertainty over economic prospects has also increased,'' Hayami told a press conference after a BOJ Policy Board meeting which decided on the measures by a majority vote.

''At the same time, prices have been displaying weak developments, and there is renewed concern that downward pressure on prices stemming from weak demand might intensify,'' he said.

The cutbacks in the two lending rates are designed to help return the economy back to a recovery path and attain price stability, Hayami said.

He said it will continue a flexible monetary policy to help the economy return to a path of self-sustained recovery.

The decision to cut the overnight call rate is an apparent policy shift by the BOJ, which finally acknowledged increasing deflationary pressure.

The central bank had kept the target for the overnight call money lending rate at around 0.25% since it ended its zero rate policy in August, saying deflationary concerns had subsided.

Hayami had repeatedly said monetary policy had substantially been eased with the target rate of 0.25%.

Since the termination of the zero rate policy, senior bank officials had categorized price falls as ''good price falls'' stemming from increased productivity and technological innovation, distinguishing the falls arising from weak demand.

Consumer prices in Japan fell by a record 0.7% in 2000 for the second straight year of decline due to lower prices of fresh vegetables and industrial products.

The central bank's decision to cut the interest rates also stems from worsening economic activity, as revealed in dismal economic data and stock prices, Hayami said.

The Ministry of Economy, Trade and Industry (METI) earlier in the day downgraded its assessment of Japan's industrial production activities for a second successive month after a bad showing in January.

The ministry said in a preliminary report that output at mines and factories slid a seasonally adjusted 3.9% from December.

The key 225-issue Nikkei Stock Average, meanwhile, plummeted to a 29-month closing low Wednesday as tumbling U.S. technology stocks and bleak data on Japan's economy dealt a double punch to the Tokyo equity market.

Stock prices have been on the decline even after the BOJ decided at its previous Policy Board meeting on Feb. 9 to reduce the official discount rate by 0.15 percentage point to 0.35% and introduce a new standby lending facility.

The BOJ has also been under intense pressure to ensure effective monetary policy to deal with the fragile economic recovery.

Japan's counterparts from the Group of Seven (G-7) economic powers urged Japan at their meeting on Feb. 17 to continue a supportive monetary policy to avert the negative impacts of deflation.

Some politicians are also pressuring the BOJ to further ease its monetary policy, demanding the central bank reinstate the zero-interest-rate policy or implement a quantitative monetary easing.

The politicians claim the central bank's inappropriate monetary policy, such as the termination of the zero rate policy last August, is partly responsible for the standstill in the nation's economic recovery.

Quantitative easing refers to such BOJ policy tools as funneling large liquidity into the money market, promoting outright purchase of long-term government bonds, making the yen weaker, and expanding the monetary base -- money in circulation plus private banks' deposits at the central bank.
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Publication:Japan Weekly Monitor
Date:Mar 5, 2001
Previous Article:Economy minister praises BOJ's rate cut.
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