The Bank says it will try to pump up the money supply in a radical policy departure aimed at counteracting a rapidly weakening economy and falling prices. The central bank said its Policy Board, which met against a background of intense political pressure for drastic action, had decided to increase bank reserves parked at the BOJ to around five trillion yen compared with around four trillion now. It said the move would allow money-market interest rates to fall virtually to zero, from 0.15 per cent now. The central bank said it would pursue the new policy until the consumer price index, which has fallen for the past two years, stabilises above zero. By adopting a monetary aggregate target, the BOJ is stepping into uncharted territory.
Bank reserves are the basic building block of loan and money growth.
When the Bank of Japan decided last summer to end the near-zero interest rate policy that it began in 1999, it had said there were no dangers of deflation. President George W. Bush. Mori, one of Japan's least popular prime ministers, has been plagued by gaffes and scandals, and public dissatisfaction has been growing over his apparent inability to boost the economy. Some analysts remained skeptical whether anything the Bank of Japan could do would bring about quick recovery unless commercial banks start Japan on a clean slate by wiping out their bad loans. The Bank of Japan has lowered interest rates twice this year.