Japanese central bank adopts new measures to boost liquidity HONG KONG (MarketWatch) -- The Bank of Japan cut its key interest rate to 0.1% from 0.3% Friday and said it would begin buying corporate debt and expand its purchases of government debt, after downgrading its assessment of the economy and warning a deepening recession lies ahead. "Economic conditions have been deteriorating and are likely to increase in severity for the immediate future," the Bank of Japan said in a statement accompanying its rate decision. The interest rate cut was the second by the Bank of Japan in two months and follows the U.S. Federal Reserve's decision Tuesday to cut the federal funds target rate to just above zero. See full story. Friday's decision was carried in 7-1 vote, with policy board member Tadao Noda opposed to the reduction. Governor Masaaki Shirakawa and other board members also voted unanimously to adopt additional measures to boost liquidity in the financial and corporate debt markets, including an increase in the Japanese government bonds that it can purchase monthly to 1.4 trillion yen ($15.9 billion) from 1.2 trillion yen earlier, in addition to increasing the range of government bonds that it can purchase. The BOJ said the purchasing of commercial paper is a temporary measure, and that it will also look into "how other corporate financing instruments may be employed." Speaking at a post rate-meeting press conference Friday Shirakawa told reporters the rate cut "is aimed at stimulating the economy." Shirakawa also indicated the sharp appreciation of the yen, which surged to a 13-year high against the U.S. dollar earlier this week, was one factor behind the rate cut, adding that excessive volatility in the currency markets was bad for the economy. The dollar bought 88.66 yen late Friday in Tokyo, easing from its close of 89.51 yen in late New York trade Thursday. The dollar fell to a 13-year low of around 87.11 yen Wednesday. The cut came as the Japanese government reportedly approved an emergency stimulus package worth 43 trillion yen to improve a worsening employment situation and ease financing worries in the corporate sector. See full story. "My first impression is that the Bank of Japan has shifted their way of thinking from conservative to aggressive," said Masamichi Adachi, senior economist with J.P. Morgan in Tokyo. "Sentiment is bad and the outlook is quite dark... probably this recession could be the worst since the Second World War." In adopting the additional policy measures and cutting rates, the Bank of Japan moves a step closer to its policies from 2001 to 2006, when it targeted the quantity of money in the banking system as a way to stimulate the economy. "Quantitative easing ... appears set to return as the Bank of Japan and the U.S. Federal Reserve increase their direct purchasing of government securities," wrote Tine Olsen, an economist with Moody's Economy.com in Sydney. The Cabinet Office said Friday the economy is likely to contract 0.8% in the fiscal year ending in March, and then grow almost nil in the following year. The government had forecast in July the economy would expand 1.3% in the current fiscal year. Economists said in buying corporate debt the BOJ was seeking to loosen up credit markets which haven't been functioning normally since the financial upheaval that ripped across global markets in early autumn. "The BoJ's decision will have a positive impact on the credit situation," said J.P. Morgan's Adachi. As part of its government debt plan, purchases of these securities will be expanded to include 30-year, floating rate and inflation indexed bond. The BOJ also said a new facility that will accept corporate debt as collateral against lending will go into effect Jan. 8. The plan was announced by the central bank on Dec. 2 as part of an effort to make more funds available to companies ahead of the fiscal year end. Steps to ease credit Speculation circulated midweek the BOJ would take steps to ease monetary conditions at the conclusion of its two day meeting Friday. Economists said the central bank would likely seek more time to evaluate the effects of its recent interest rate reduction before cutting again, likely opting instead to unveil new measures aimed at easing the credit crunch at the corporate level.

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