Japan loosens monetary policy

Money will be easier to come by in the Japanese markets

The Bank of Japan (BoJ) has decided to make borrowing money cheaper as the weight of huge bad debts and sliding prices continues to cripple the country's domestic economy.

After a majority vote, the BoJ is trying to put more money into circulation to allow hard-pressed banks to lend more.

Other countries might use a cut in interest rates to encourage lending. But Japan's short-term interest rates are already at zero, after an aggressive loosening of policy in March.

Instead, the BoJ is raising its target for current-account deposits at the central bank to 6 trillion yen (£34bn; $49bn) from 5 trillion yen.

The bank also said it will boost its monthly purchases of long-term Japanese government bonds to 600bn yen from the previous 400bn yen.

GDP fears

The decision comes three weeks before the unveiling of Japan's latest gross domestic product figures, which are widely expected to show the health of the economy is, if anything, getting worse.

Many observers expected the Bank to make its move after the figures, according to Fiachra McCanna, head of research at WestLB.

"The timing more than the level of it was a surprise," he told the BBC's World Business Report.

"They moved for two reasons - because they expect the numbers to be really horrible, and because if they didn't move beforehand, the politicians will blame them for the turn in the economy."

Cosmetic decision

He doubted whether the move will have much practical effect, though.

"I don't think that the BoJ itself really believes it will boost the economy," said Mr McCanna.

"They've often said that under the current circumstances monetary policy can only play a limited role. With the huge amount of bad debt they have in the system, banks are simply unwilling - or unable - to lend money to corporations and so it really makes no difference how much liquidity you pump into the economy."

Vincent Musumeci, an economist at ABN Amro, was harsher, saying that the decision was entirely cosmetic.

"They had to show some easing effort and this is their reaction to pressure," he said.

"It doesn't change the fact that monetary policy is ineffective. It doesn't make any difference since rates are at zero."

Japan's politicians have put enormous pressure on the BOJ to help stimulate the economy, but after many rounds of policy loosening, each fresh change has less dramatic effect.

Some argue that the ball is now in the politicians' court.

"They really do have no other option at this point...we just have to hope and pray that the politicians implement the reform...nothing would be worse than to flood the economy with money and then the politicians not do anything else, then we would really be in a pickle," Kenneth Courtis, vice chairman of Goldman Sachs Asia, told the World Business Report.

Market cheer

Still, the move comes at a crucial time for the Japanese economy and financial markets.

Japanese shares fell by more than 2% on Monday, to their lowest level since 1984.

Revised figures released by the Ministry of Economy, Trade and Industry on Tuesday showed that industrial output in June was down 8.7% year on year, compared with an annual slowing of only 3.9% in May.

The yen reacted quickly to the monetary-policy news, sliding from 122.38 to 123.14 in the US dollar in the minutes after the announcement.

And the Nikkei 225 share index bounced sharply, closing up 440.39 points at 11,917.95, more than erasing the previous day's losses.