Japanese rates head back to zero as central bank starts the ball rolling

By Jason Clenfield  |   2008-11-3  |     NEWSPAPER EDITION

THE Bank of Japan's interest rates may be headed back to zero.

Governor Masaaki Shirakawa and his board on Friday cut the key overnight lending rate by 20 basis points to 0.3 percent, abandoning a two-year struggle to raise the lowest borrowing costs among major economies, Bloomberg News reported.

Three of the eight members argued for a deeper cut of 25 basis points and one wanted no change.

"We are headed back to a zero-interest-rate world," said Tomoko Fujii, head of economics and strategy at Bank of America Corp in Tokyo.

Should interest rates return to zero, the Bank of Japan may not be alone. Federal Reserve Bank of San Francisco President Janet Yellen said last week that the United States central bank may cut the benchmark rate close to zero from 1 percent level if the economy remained weak.

Shirakawa, 59, cast the deciding vote on Friday after the board was evenly split for the first time since the central bank gained its independence from the government 10 years ago.

The Bank of Japan would do its utmost to get the economy growing again "through maintaining accommodative financial conditions," it said in a statement accompanying the reduction decision.

Hiromichi Shirakawa, chief Japan economist at Credit Suisse Group in Tokyo, said this language suggested the bank would keep rates low until the global economy picked up.

"It'll be very difficult for the Bank of Japan to avoid reintroducing the zero-rate policy," said Shirakawa, who used to work at the central bank, but is no relation to the governor. "The question is only when." The bank's twice-yearly outlook issued on Friday may partly explain the reason for the reduction in lending rates.

Inflation concerns

Inflation may fall back to 0 percent next fiscal year, the bank predicted. It also slashed its growth forecast for the year ending March to 0.1 percent from 1.2 percent in July.