Japan Trims Overnight Rate to Record Low

The Bank of Japan on Friday cut a key short-term interest rate to a record low, aiming to prevent a strong currency and surging long-term bond yields from prolonging the nation’s woes.

It lowered the target rate for overnight inter-bank lending to 0.15% from 0.25%.

“The Bank of Japan’s perception is that the [state of the] Japanese economy is terribly bad,” said Akio Makabe, analyst at Dai-Ichi Kangyo Research Institute.

The BOJ also voted to lower from 0.5% to 0.25% the special rate it charges commercial banks that increase lending to companies. The central bank set up a lending facility in November to stimulate lending by banks to corporations hurt by Japan’s credit squeeze.

Long-term Japanese government bond yields have jumped from 0.7% in October to nearly 2.5%, in large part because investors fear that heavy government borrowing aimed at bailing out the economy will swamp the market with debt.

By cutting short-term rates, the BOJ is hoping to ease pressure on long-term yields, bank Gov. Masaru Hayami said.

But the BOJ declined to take another step the government has been requesting: that the bank step up its purchases of government bonds in the secondary market, a move that could directly push long-term yields lower.

Instead, the BOJ said it will use so-called repurchase agreements to “supply ample funds” to the economy. In a repurchase agreement the central bank temporarily buys bonds from investors, with the understanding that the investors will repurchase the bonds at another time.

Japanese 10-year bond yields ended at 2.19% Friday, up from 2.11% a day earlier but below the 2.44% of a week ago.