The bank cut the overnight call rate target to a range of 0.00% to 0.1%, the lowest level since 2006. It last cut the target rate to 0.1% from 0.3% in December 2008.
Policymakers also will establish a $60 billion (5 trillion yen) fund to buy government bonds and other assets, inflating the balance sheet at a time when U.S. and U.K. central bankers are contemplating doing the same.
"With today's decision, the Bank of Japan paved the path for the next step," Junko Nishioka, chief economist at RBS Securities Japan Ltd. in Tokyo told Bloomberg News. "What will be critical will be how foreign-exchange rates move as a result," along with the impact of any additional easing by the Federal Reserve, she said.
Business leaders have urged authorities to step up efforts to shield exports from the yen's surge to a 15-year high in September. Officials last month intervened in the currency market for the first time since 2004, selling 2.12 trillion yen to halt the currency's gains.
The central bank may sell yen again at anytime, Joseph Capurso, a foreign- exchange strategist at Commonwealth Bank of Australia in Sydney told Bloomberg.
There is ample evidence the yen's strength is hindering economic growth.
Industrial production unexpectedly declined for a third month and gains in retail sales were smaller than economists' forecast, government figures released last week showed. The overall economy grew just 1.7% in the April- June period, compared to a 5% expansion in the first three months of the year.
Japan's economy will probably contract in the fourth quarter because the government's incentives to subsidize energy efficient cars expired in September, and increased consumer spending due to an unusually hot summer will wane, Masaaki Kanno, a former BOJ official and now chief Japan economist at JPMorgan Chase & Co. (NYSE: JPM) in Tokyo told Bloomberg.
By artificially devaluing the yen, Japan joins a chorus of countries entering what is now being called an "international currency war."
The war already involves China, Japan, Brazil, Korea and even the United States, to name just a few of the main combatants.
The U.S. Federal Reserve has held its benchmark-lending rate down in a record low range of 0.00% to 0.25% for close to two years now in an effort to boost its exports and shore up the economy. And governments from South Korea to Brazil are stepping up attempts to control their currencies as investors pour a record amount of money into emerging markets.
Investors have plowed a record $49.4 billion into emerging-market stock funds this year and $39.5 billion into bond funds, EPFR Global data show. Pacific Investment Management Co. LLC, which manages more than $1 trillion, in April raised its holdings of developing-nation bonds to the most since 2008.
World Bank President Robert Zoellick said yesterday that he sees tensions rising from currency devaluations as nations seek to buoy their economies.
"This war is over the ability to export finished products, to importing nations," Contributing Writer Jack Barnes wrote in yesterday's edition of Money Morning. "It is about keeping your own citizens employed during an extended economic slowdown in global demand, even if that means damaging national relationships. This war will vault the winners into positions of global leadership, while severely penalizing the losers."
Meanwhile, central banks around the world are weighing the need for more stimulus as growth cools.
Federal Reserve Chairman Ben S. Bernanke said this week the Fed's large-scale asset purchases improved the economy and further buying is likely to help more. The European Central Bank (ECB) last week stepped up its government-bond purchases.
But keeping economies afloat through the use of stimulus programs and loose monetary policies comes at a steep price, leaving many countries facing giant fiscal deficits that threaten to overwhelm their ability to fund operations.
The nation's economic future would be endangered if the government does not rein in budget deficits in the years ahead, Bernanke said Monday, and Congress should consider new budgeting rules to try to make that happen, the Washington Post reported.
Bernanke has been vigorously trying to give more momentum to efforts to reduce the budget deficit in the medium to long term, and said it is "crucially important" that fiscal policy be put on a more sustainable path.
He did, however, say "economic conditions provide little scope for reducing deficits significantly further over the next year or two" and that "premature fiscal tightening could put the recovery at risk."
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