HONG KONG (MarketWatch) -- The Bank of Japan's Policy Board voted unanimously Friday to hold its key overnight call rate unchanged at 0.3%, as expected.
In its accompanying statement, the policy board noted economic activity had "been increasingly sluggish" because of falling global exports and the effects of earlier rises in energy and material prices. The board noted the outlook remains highly uncertain, adding it would "take some time for the necessary conditions for Japan economic recovery to be satisfied."
Among risk factors, the board noted further downward pressure on the economy could emerge if further deterioration is seen in the corporate bond and corporate paper markets, and if financial institutions continue to hold back on new lending.
The central bank said it would carry its purchases of commercial paper with "more flexibility" in an effort to jump-start markets that support corporate financing.
The bank also said it would study a proposal to enable companies to treat corporate debt as collateral, as part of measures that could be used to beef up liquidity flowing into the collateralized debt markets.
A post-meeting press conference by Gov. Masaaki Shirakawa, was expected to provide further clues to the direction of the central bank's policy.
The meeting was the since first policy board members voted last month to abandon the central bank's goal of raising interest rates. Instead, policymakers opted to ease, and support the economy to offset the effects of the global financial crisis.
At that meeting the central bank lowered its overnight call rate to 0.3% from 0.5%, marking the first time Japan had cut rates in seven years and seven months.
Few had expected further cuts to the overnight call rate, already the lowest among industrialized nations. The consensus view was that central bank would try to conserve its few remaining basis points of potential easing for future days. The futures market was pricing in a 9% chance of quarter-point rate cut, according to calculations by Credit Suisse.
Still, some analysts say the current situation warrants further easing as early as next month, at the bank's Dec. 19 meeting, depending on whether the U.S. Federal Reserve cuts U.S. rates.
"Although the BOJ is basically reluctant to re-introduce zero interest rate policy or quantitative easing (with a bank reserve target well above requirements), which undermined money market functions in the past, the deepening of the recession and potential upward pressure on the yen due to an expected U.S. Fed funds rate cut on Dec. 16 will probably prompt the [central bank] to another rate cut," said Tomoko Fujii, head of economics and strategy for Japan at Bank of America in Tokyo.
"Thereafter, however, the bank probably will wait for effects of the second supplementary budget, while seeking more measures to enhance effects of liquidity injections and support bank balance sheets," she wrote in a recent note to clients.
Quantitative monetary easing policy, which the BOJ adopted with its zero rate policy, carries out monetary easing by using money supply rather than interest rates as its main tool. The benefit of the policy is that more funds can be supplied, even after official rates fall to zero, thereby expanding monetary easing further.
The BOJ ended its quantitative easing in March 2006.
Action pledged
Deputy Gov. Kiyohiko Nishimura said Monday that global financial conditions had deteriorated and pledged action by the central bank, although he didn't provide details.
The BOJ "will make efforts to stabilize financial markets, while carefully watching global financial market developments," newswire reports quoted Nishimura as saying in a speech in Tokyo.
The speech, delivered in the wake of the G-20 meeting in Washington, indicated the BOJ would continue to take steps in tandem with other central banks around the world.
Economic data released since the October meeting indicate the Japanese economy has taken a turn for the worse.
Consumer sentiment in October plunged to an all-time low of 29.4, according to a survey by the Cabinet Office. Employment conditions also deteriorated during the month as 1,429 firms, including 8 listed companies, filed for bankruptcy.
"Consumers are growing increasingly concerned over the t employment/income outlook as they contemplate worsening corporate earnings and an erosion in the value of their financial asset holdings," wrote Credit Suisse economists headed by Hiromichi Shirakawa in Tokyo.
Pointing to the difficulties faced by industry, core machinery orders fell 10.4% in the July to September period against the preceding quarter, the first decline in five quarters and tying the second quarter of 1998 as the biggest on record.
Japan's gross domestic product contracted 0.4% on an annualized basis in the third quarter from the second, ending a six-year expansion. Economist had expected GDP to hold just above the recession threshold, at a 0.1% expansion during the quarter.
"The recession is under way," said Bank of America's Fujii. "A recovery to trend-pace growth is not likely until late 2009. In 2009 as a whole, real GDP remains likely to drop by 0.2%."
