Japan Moves to Loosen Credit

In a rare move aimed at making credit more widely available, the Bank of Japan on Tuesday announced that it will slash by about 40% the amount of money that commercial banks must keep in reserve at the central bank.

The cut in reserve requirements, which will become effective Oct. 16, is the first in more than five years.

Economists said it is the most dramatic of a series of actions the central bank has taken since midyear to ensure that the current slowdown doesn’t turn into something more severe.

The bank cut its benchmark discount rate on July 1 by a half point, to 5.5%. Over the past three months it has also gradually reduced another key short-term interest rate, dubbed the call rate, by more than a full percentage point, to about 6.9%.

“There’s a tremendous liquidity squeeze out there, and this is an expression by the monetary authorities that, in spite of what they have said, they are concerned about the tightness of liquidity in the economy,” said Kenneth Courtis, chief economist at Deutsche Bank’s Tokyo office. “Since banks will . . . keep less money on reserve at the central bank, it means they will have more money to lend out to the economy as a whole.”

Tokyo stocks surged in response to the announcement. The Nikkei index finished the day at 24,377.01, up 460.57 points, or 1.93%, from Monday’s close.

The credit-easing moves have come amid growing signs that Japan’s economy, which has grown for a record 58 straight months at annual rates exceeding 5%, is losing much of its steam, even though it remains considerably more robust than the U.S. economy.