The Bank of Japan cut its key interest rate on Friday for the first time in more than seven years, finally joining central banks around the world in trimming borrowing costs to cushion the impact of the global financial crisis.
The Bank of Japan policy board voted in a rare 4-4 split decision to reduce the uncollateralized overnight call rate from 0.5 percent to 0.3 percent, a bit less than the quarter-point cut expected by the market.
Gov. Masaaki Shirakawa, who has the final say in the event of a tie, said three of the four dissenters actually favored a bigger cut to 0.25 percent.
The central bank, operating with one vacancy on its nine-member board, last loosened monetary policy in March 2001.
“Adjustments in the world economy stemming from financial crises in the United States and Europe have further increased in severity,” the Bank of Japan said.
In its semiannual outlook report, the central bank slashed its projection for economic growth to just 0.1 percent for the year through March, compared with a 1.2 percent gain it projected in July. It said both exports and domestic private demand has weakened.
The Bank of Japan’s move comes two days after the U.S. Federal Reserve slashed its key rate by half a percentage point to 1 percent, a level seen only once before in the last half century. Earlier this week, South Korea’s central bank lowered rates by three-quarters of a point — its biggest cut ever — to 4.25 percent. China, Hong Kong and Taiwan also reduced rates this week.
Many analysts are also expecting the European Central Bank to cut its key rate, now at 3.75 percent, when its policy panel meets on Nov. 6.
Investor hopes for a rate cut intensified this week after The Nikkei financial daily reported Wednesday that the central bank was mulling a policy shift. The speculation reigned in a recently surging yen and helped fuel a rally in Japan’s stock market, where the Nikkei index jumped nearly 10 percent Thursday.
The Nikkei slid 5 percent Friday, with losses accelerating in the final hour of trading. Markets, which had already priced in a rate cut, shrugged off the central bank’s announcement and instead unloaded shares for quick profits ahead of a long weekend. Tokyo markets will be closed Monday for a national holiday.
“Investors have no idea what could happen over the next three days,” said Harushige Kobayashi, equity strategies at Maruwa Securities in Tokyo. “And stocks gained so much yesterday that some pullback was inevitable.”
The Bank of Japan had until now left monetary policy untouched, reiterating its long-held stance that the world’s second-largest economy faced both upside and downside risks. The benchmark rate had stood at 0.5 percent since February 2007.
But extreme developments over the last several weeks, including historic equity market losses and and the surging yen, convinced seven of eight board members that it was time to respond with a policy shift, Shirakawa told reporters.
“It has been extremely volatile,” he said. “Financial markets have undergone a big change.”
Shirakawa, who had repeatedly stressed in the past that the benchmark rate was already low, said the severity of the situation now called for a cut to “maintain accommodative financial conditions.”
Government officials, who had become increasingly vocal this week about the need for a rate cut, applauded the decision.
“This financial crisis affects the world, and it is important to take an internationally coordinated approach,” said Senior Vice Finance Minister Wataru Takeshita, according to Kyodo news agency. “We’d like to welcome the decision” by the BOJ.
On Thursday, Japanese Prime Minister Taro Aso announced a 27 trillion yen ($275 billion) stimulus package to shore up the world’s No. 2 economy, including expanded credits for small businesses and a cash payback to every household.
Shirakawa, however, stressed that the policy board’s vote was in no way swayed by political pressure.
In addition to reducing interest rates, the policy board voted to enact credit-easing measures including a temporary facility to pay 0.1 percent interest on commercial banks’ excess reserves deposited at the Bank of Japan.
It also lowered its basic loan rate, at which financial institutions directly borrow from the BOJ, to 0.5 percent from 0.75 percent.
The central bank’s actions Friday follow a series of weak economic data recently, as well as evidence earlier Friday that inflation was slowing.
For the July-September period, industrial output fell 1.2 percent from the previous three months in its third straight quarter of declines, and factory production is expected to drop 2.3 percent in October and 2.2 percent in November.
Core inflation, which excludes fresh food prices, jumped 2.3 percent during the month from a year earlier on still-high fuel and food costs. That’s down a touch from August’s 2.4 percent rise.
Fuel costs in particular are cooling, with gasoline prices rising 20.7 percent in September, down from 26.4 percent in August.
“As for prices, consumer price inflation is likely to decline gradually reflecting the recent fall in commodity prices, although it remains relatively high to date,” the central bank said.

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