By Mayumi Otsuma Nov. 21 (Bloomberg) -- The Bank of Japan held its benchmark interest rate at 0.3 percent and said it will consider pumping more money into the financial system to prop up an economy that fell into a recession last quarter. Governor Masaaki Shirakawa instructed his staff to study new ways of making money available for lending, such as accepting corporate debt as collateral, the central bank said in a statement in Tokyo today. The unanimous rate decision followed a cut from 0.5 percent last month, the first in seven years. Shirakawa has indicated he is reluctant to revive the bank's 2001-2006 policy of keeping rates near zero, saying further reductions could freeze the money market by making it unprofitable for banks to lend to each other. He could be forced to trim borrowing costs anyway should the global financial turmoil prolong Japan's downturn. ``The chance that the Bank of Japan will make a further reduction is slim, given that the governor has underlined the negative effects of zero interest rates,'' said Mari Iwashita, chief market economist at Daiwa Securities SMBC Co. in Tokyo. ``Even so, we can't rule out an additional cut if the economic situation drastically changes.'' The yen traded at 94.81 per dollar as of 1:23 p.m. compared with 94.26 before the announcement. Japan's currency has surged 12 percent against the dollar since September. The yield on the 10-year government bond fell 3.5 basis points to 1.4 percent. Credit Squeeze The central bank said it was concerned that companies are finding it harder to get funding as the global credit squeeze deepens. The economic slump may worsen should lenders' reluctance to accept bonds and commercial paper from companies ``increase in severity,'' it said. Shirakawa told the central bank to ``swiftly'' look at ``possible changes in the treatment of corporate debt as collateral, as well as possible ways to enhance flexibility in funds-supplying operations collateralized by corporate debt,'' the statement said. The Bank of Japan held the key interest rate at zero from 2001 to 2006 and flooded the banking system with extra cash to encourage lending, spur growth and overcome deflation. Shirakawa, who helped implement the policy as a BOJ official, said in May that it had ``only a limited impact'' in propping up growth. Shirakawa said this month that lowering borrowing costs too much may ``hamper proper functioning of the market mechanism.'' Rates that are too low will sap interest income to ``a level insufficient to cover various transaction fees, which in turn may reduce the volume of transactions in the market and bring about a reduction in market liquidity,'' he said on Nov. 6. `Very Reluctant' ``Shirakawa is very reluctant to cut rates to zero,'' said Peter Wilson, a strategist at Mitsubishi UFJ Financial Group Inc. in London. ``The Bank of Japan has always stressed the negative side effects of a dysfunctional money-market mechanism.'' Still, the prospect of a worsening recession is increasing pressure on the central bank to prop up the economy. Japan's economy will shrink this year and next in the first back-to-back contractions since the onset of a banking crisis a decade ago, economists say. Gross domestic product will fall 0.45 percent in the year ending March 2009 and 0.3 percent in the following 12 months, according to the median estimate of 16 economists surveyed by Bloomberg News. The Nikkei 225 Stock Average is heading for its ninth weekly decline, and has lost 49 percent of its value this year. Finance Minister Shoichi Nakagawa said today that the government is considering how to counter the stock-market slump. Exporters' Woes The world recession and the yen's gains are eroding exporters' profits, prompting them to slash production and fire staff. Sharp Corp. said today that it may cut temporary workers at factories that make parts for digital cameras and flat-panel televisions. The U.S. Federal Reserve and the European Central Bank will probably cut rates next month after their economies slipped into recessions. The Bank of Japan will follow ``in the upcoming months,'' said Jan Lambregts. ``We think the global synchronized recession and global financial crisis are serious enough to prompt yet another token cut'' by the Bank of Japan, said Lambregts, head of Asia research at Rabobank International in Hong Kong. ``But we doubt the BOJ is willing to cut rates all the way to zero percent.'' There is a 28 percent chance of a reduction by March, according to calculations made by JPMorgan Chase & Co. based on interest-rate swaps trading. Nine of 28 economists surveyed forecast a move by then. Today's rate decision was anticipated by all 35 economists surveyed by Bloomberg News. Governor Shirakawa will speak at a press briefing at 3:30 p.m. To contact the reporter on this story: Mayumi Otsuma in Tokyo at motsuma@bloomberg.net

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