Japan's central bank cut its key interest rate to virtually zero Tuesday and said it may set up a $60 billion fund to buy government bonds and other assets in a surprise move to inject life into a faltering economy.
In a unanimous vote, the Bank of Japan's nine-member policy board set its overnight call rate target to a range of zero to 0.1 percent. The central bank had not changed the rate since December 2008, when it was set at 0.1 percent.
The decision underscores growing worries about the Japanese economy, which is being battered by a strong yen and persistent deflation. Recent economic indicators point toward deteriorating exports, industrial production and corporate sentiment.
"Although Japan's economy still shows signs of a moderate recovery, 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," the central bank said in its statement.
Board members will also examine establishing a temporary 5-trillion-yen ($60 billion) fund to purchase various financial assets such as government securities, commercial paper and corporate bonds in an attempt to stimulate the economy by lowering longer-term interest rates. The central bank will offer another 30 trillion yen ($359 billion) through its loan program.
The rate cut weakened the yen and gave an immediate boost to the stock market, with the Nikkei 225 index jumping 1.5 percent to 9,519.46 after spending much of the day in negative territory.
The central bank's decision comes amid speculation that other central banks may also ease policy. Federal Reserve Chairman Ben Bernanke fanned expectations Monday when he said that the economy could be helped by another round of asset purchases by the central bank.
The Fed, which meets next on Nov. 2-3, is considering launching a new program to buy government debt, a move aimed at driving down rates on mortgages, corporate loans and other debt. During the recession, the Fed ended up buying a total of roughly $1.7 trillion of mortgage securities and debt, as well as government bonds.
Slowing growth in the U.S. is just one of the headaches facing Japan, which has relied on overseas demand to fuel its recovery.
Data last week showed that core consumer prices in August fell for the 18th straight month as a strong yen pushed import prices south.
While lower prices may boost individual purchasing power, deflation hamstrings an economy. It plagued Japan during its "Lost Decade" in the 1990s, curtailing growth by dragging company profits, sparking wage cuts and causing consumers to postpone purchases. It also can increase debt burdens.
The central bank said it would maintain zero interest rates until it deems prices have stopped falling.
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