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Japan Lowers Bank Lending Rate

September 9, 1998

TOKYO (AP) _ Japan’s central bank eased its monetary policy on Wednesday, aiming to boost the flow of funds to capital-starved Japanese companies and stop the economy from falling into a deflationary spiral.

The Bank of Japan lowered the target for the overnight call money rate _ the rate banks charge each other for overnight lending without collateral _ to around 0.25 percent from around 0.5 percent.

The move, which came after the markets closed for the day there, makes it cheaper for banks to obtain funds and could reduce corporate borrowing costs.

The target is the lowest ever in Japan, though the rate has occasionally gone lower than that. The bank does not set the rate, but only sets a target.

The decision _ the first easing of policy since 1995 _ does not affect the official discount rate, which is at a record low of 0.5 percent. The discount rate is the central bank’s charge on loans to banks.

The measure comes as Japan is battling its worst recession since World War II. Consumption is stagnant and officials fear a destructive deflationary spiral unless the economy improves.

``The biggest goal for the easing is to provide even more funds to the markets and help reduce pressures on corporate fund raising,″ said Bank of Japan Governor Masaru Hayami.

Hayami said he believes that if banks have ample funds, the so-called ``credit crunch″ _ or tightened lending by financial institutions _ will disappear as another positive effect of the new policy.

The easing is expected to at least temporarily reduce pressure on the rickety banking sector and avert system-wide instability.

But in the absence of more aggressive fiscal policy and deep structural reform of the banking system and the economy, it’s unlikely to pull Japan out of its recession, critics said.

``The move underscores a lack of any real policy initiatives from the fiscal side,″ Cameron Umetsu, senior strategist in charge of money and foreign exchange at Warburg Dillon Read in Tokyo, told Dow Jones Newswires.

``It’s an act of desperation ... BOJ easing without structural reform will have very little effect,″ he said. ``Japan again resorted to traditional measures when progress on key restructuring was needed.″

While the cut in overnight call rates will help banks’ funding, it won’t immediately provide any boost to the economy, said Susumu Kato, senior economist at Barclays Capital Japan.

``It’s not something that will directly affect the economy,″ he told Dow Jones.

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