Bank of Japan Reverts to Zero Rates in Surprise Move - CNBC

The Bank of Japan on Tuesday effectively reverted to zero interest rates on growing signs the
strong yen is hurting a fragile economy, surprising markets and preceding the Federal Reserve in stepping up its expansionary monetary policy.

The central bank also decided to set up, as a temporary measure, a 5 trillion yen ($60 billion) fund to buy assets ranging from government bonds and short-term government securities to commercial paper and corporate bonds, and will also accept another 30 trillion yen of those assets as collateral under a loan scheme.

The BOJ said it would guide the overnight call rate at a range of zero to 0.1 percent, against the previous target of 0.1 percent. It also pledged to keep rates effectively at zero until
prices were seen stabilising.

"The BOJ is bringing its monetary policy closer to quantitative easing, allowing market rates to hover near zero and pledging to keep a near-zero interest rate policy in the longer term until prices stabilise," said Naomi Hasegawa, senior fixed-income strategist at Mitsubishi UFJ Morgan Stanley Securities.

"These steps are more aggressive than markets had expected. The BOJ's decision is a surprise and will have an impact on currencies due to the message it delivers."

Central Banks Under Pressure

The surprise move weakened the yen against the dollar, pushed up Japanese government bond futures and helped stock prices turn positive.

The decision to cut interest rates was made by a unanimous vote, but board member Miyako Suda opposed including government bonds among the type of assets the BOJ could buy using its pool of funds.

The BOJ is not the only central bank under pressure to do more to support an economy that is showing signs of faltering.

Financial markets expect the Fed to embark upon another round of asset buying to bolster a sluggish recovery as early as its November meeting. There are also calls within the Bank of England for further easing, although the bank has kept markets guessing on whether it will indeed do so.

In Japan, slowing export growth, a surprise fall in factory output and companies' worries that the strong yen may hurt the outlook have heightened the case for the central bank to ease
policy.

The government, which intervened in the currency market last month to stem sharp yen gains, has piled pressure on the BOJ for fresh action to support the economy.

But BOJ officials have been struggling to reach a consensus on whether to use some of the bank's depleted policy options now or later, and how aggressive any measure should be.

The BOJ had already been edging nearer to quantitative easing by allowing the yen pumped into markets through currency intervention to remain in the financial system, instead of
draining it.