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BOJ holds rates steady
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October 13, 1999: 3:29 p.m. ET
Japanese central bank sticks to zero rates, steps up monetary easing moves
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NEW YORK (CNNfn) - Japan's central bank opted to keep its zero-interest-rate policy Wednesday and introduced new measures that will inject more cash into the country's struggling economy -- a move seen by analysts as a way to keep the yen from rising and Japan's fragile economic recovery from lapsing.
Optimism that Japan's economy had finally turned the corner pushed the yen up almost 14 percent against the U.S. dollar last month, prompting calls both at home and abroad for the Japanese government to do something about it. A strong yen makes Japanese exports more expensive in world markets and eventually can deter consumers and businesses from buying.
In response, Japan's central bank announced Wednesday it is keeping interest rates at zero and introducing a new plan to inject even more money into the country's economy, essentially flooding the market with yen to keep its value from appreciating.
"The zero interest rate policy is not changed but what is most important is having the effects of the zero interest rate policy permeate the market," said BOJ Governor Masaru Hayami.
How it works
How it works sounds more complicated than it is.
Japan has kept its interest rates at or near zero percent for years in a bid to encourage investors to borrow cheap money and inject those funds into the ailing economy. Typically, low interest rates deter investors from buying into a country's currency and securities because they don't pay much interest or, in Japan's case, no interest at all.
The U.S. Federal Reserve's benchmark short-term interest rate, by comparison, is 5.25 percent.
The dollar's decline vs. the yen wasn't pretty last month
Last month, investors began buying the yen anyway on optimism that the economy was showing signs of growth and that interest rates eventually would rise. Since the Bank of Japan can't lower rates any more than zero, it announced Wednesday it will buy short-term government debt securities -- treasury bills and short-term bonds, among other things -- a move that will replace dollar amounts that are only on paper with actual cash that will circulate in the Japanese economy.
Under pressure
"The Bank of Japan is fiddling at the edges with existing policy, but this isn't a quantitative easing," said Russell Jones, chief economist for Asia Pacific at Lehman Brothers. Brendan Brown, chief economist at Bank of Tokyo, however, welcomed the move as "a fairly significant set of steps."
Japanese officials have come under pressure both at home and abroad lately to curb the strength of the yen -- most notably at last month's Group of Seven meetings, where discussions about the yen's stunning rise against the U.S. currency prompted much discussion. In the end the Bank of Japan agreed to do what it could to curb the yen's rise.
Wednesday's announcement was a signal that it's doing what it can, analysts and economists said.
"This is … definitely a change in the Bank of Japan's stance so it will have a psychological impact and keep the yen soft," said Rob Hayward, economist at Bank of America in London.
Indeed, the dollar jumped to about 107.50 yen in Europe from 106.63 earlier and about 106.30 late Tuesday in New York. It settled down to 106.59 later in the day on Wednesday.
-- from staff and wire reports
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Bank of Japan
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