Bank of Japan Cuts Interest Rates, Yen Weakens

The Bank of Japan cut its interest rates today to virtually zero and announced its asset purchase program. The decision to add stimulus was rather unexpected and the yen dropped against the euro and the Great Britain pound. The dollar weakness allowed the Japanese currency managed to outperform its US counterpart.

The Bank of Japan cut its overnight call rate target from 0.1 percent to virtually zero and said:

The Bank will maintain the virtually zero interest rate policy until it judges, on the basis of the “understanding of medium- to long-term price stability,” that price stability is in sight, on condition that no problem will be identified in examining risk factors, including the accumulation of financial imbalances.

The Bank also said that it’s going “to purchase various financial assets, such as government securities, commercial paper (CP), corporate bonds, exchange-traded funds (ETFs), and Japan real estate investment trusts (J-REITs)” and that “the pace of recovery is slowing down partly due to the slowdown in overseas economies and the effects of the yen’s appreciation on business sentiment”.

Japan may be just first to introduce the easing, followed by other developed countries. The policy maker of the Bank of England will discuss further stimulus tomorrow, while the central banks of Australia, Canada and New Zealand decided to pause the rates increases. The unwillingness to increase the interest rates possibly signals that the recovery is faltering. Some analysts think that the lower interest rates wouldn’t help the economy at all and may even bring closer the double-dip recession

USD/JPY fell slightly from 83.35 to 83.22 as of 22:54 GMT after it rose to the intraday high of 83.97. EUR/JPY advanced from 114.07 to 115.15, while GBP/JPY went up from 131.93 to 132.24.

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