By Mayumi Otsuma Dec. 19 (Bloomberg) -- The Bank of Japan cut its benchmark interest rate to 0.1 percent and introduced new ways of pumping money into the banking system to bolster the ailing economy. Governor Masaaki Shirakawa and his colleagues lowered the target for the overnight lending rate from 0.3 percent in a 7- to-1 vote, the central bank said in a statement today in Tokyo. The bank also proposed to buy commercial paper to help companies gain access to funds. The central bank’s second reduction in two months came after the Federal Reserve this week cut its target rate as low as zero, driving the yen to a 13-year high against the dollar. The Japanese currency has gained 25 percent this year, eroding profits for exporters that are already cutting jobs, production and spending as the global recession deepens. “The Bank of Japan lost the option of foregoing a rate cut this time,” said Hiromichi Shirakawa, a former central bank official and now chief economist at Credit Suisse Group AG in Tokyo. “The yen is expected to keep strengthening following the Fed action, and the BOJ must do something to stem it through monetary policy,” he said. Shirakawa, who predicted a cut to 0.2 percent, isn’t related to the central bank governor. Shortly before the decision, investors saw a 50 percent chance that the central bank would lower the key rate, according to calculations made by JPMorgan Chase & Co. based on interest- rate swaps trading. Global Economy The global economy is in the worst state since the Great Depression, intensifying the risk for a prolonged slump in Japan, Shirakawa told parliament on Dec. 16. “Japan’s economy has declined at an unprecedented pace in the current quarter,” said Jun Ishii, chief fixed-income strategist at Mitsubishi UFJ Securities Co. in Tokyo. “In particular, the auto industry, which widely affects other sectors and is vital for economic growth, is heading for a decline.” The Fed’s reduction brought the U.S. key rate lower than Japan’s benchmark for the first time since 1993, making the yen a higher-yielding currency. Honda Motor Co. cited the yen’s gains and slumping sales as reasons for slashing its full-year profit forecast by 62 percent this week. President Takeo Fukui described the currency’s level of around 89 yen to the dollar as “abnormal” and called on the government and central bank to take “swift action.” Confidence among Japan’s major manufacturers fell the most in 34 years, the central bank’s quarterly Tankan survey showed this week. Nissan Motor Co., Canon Inc. and Sony Corp. are among the exporters cutting production, spending and jobs, deepening the country’s first recession since 2001. Could Shrink The world’s second-largest economy could shrink 0.8 percent next fiscal year if the government doesn’t implement stimulus measures, Economic and Fiscal Policy Minister Kaoru Yosano said today. The Cabinet Office today predicted zero growth for the year starting April 1. Prime Minister Taro Aso and Finance Minister Shoichi Nakagawa said over the past week they wanted the central bank to inject more cash into the economy to help companies borrow. Aso last week said the government would start purchasing commercial paper to help businesses get access to funds. Today the government said it would buy as much as 20 trillion yen ($223 billion) of shares held by banks to boost their capital. The Nikkei 225 Stock Average lost 44 percent this year. To contact the reporter on this story: Mayumi Otsuma in Tokyo at motsuma@bloomberg.net

Source