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Japan's central bank meets as recession deepens

Japan's central bank began a two-day meeting to discuss ways to fight a deepening economic crisis that the government says is the worst since World War II.

business Updated: Feb 18, 2009 15:15 IST

Japan's central bank began a two-day meeting on Wednesday to discuss ways to fight a deepening economic crisis that the government says is the worst since World War II.

The Bank of Japan is expected to leave its key interest rate unchanged at 0.1 per cent at the gathering, which comes just days after data showed Asia's largest economy shrank at the fastest pace since 1974 in the fourth quarter.

The bank has little room to reduce its rock-bottom interest rates further so it is seeking alternative tools to unblock credit flows.

The BoJ said earlier this month that it would buy one trillion yen (10.8 billion dollars) worth of shares held by commercial banks in an effort to keep credit flowing to cash-strapped companies.

It has also announced plans to spend up to three trillion yen to buy commercial paper, a type of short-term corporate debt.

Japan's banks have been less affected by the global credit crunch than many of their US and European peers, but they have lost money because of the plunging stock market and are becoming more reluctant to lend money.

The BoJ warned last month that Japan's economy faced a two-year recession.

With the country in the midst of its first recession in seven years, Japan has seen a sharp rise in corporate bankruptcies.

The BoJ in October cut interest rates for the first time in seven years, by 20 basis points.

Morgan Stanley economist Takehiro Sato expects the BoJ to return to a policy of zero interest rates in the second quarter of 2009, while also taking steps to mop up risky assets and buy Japanese government bonds.

The central bank has warned that very low borrowing costs could damage credit markets, but it may have to bow to a market backlash if share prices slide and the yen strengthens, he said.

Investor worries about Tokyo's handling of the economic crisis have grown since Prime Minister Taro Aso's under-fire finance minister resigned on Tuesday following claims that he was drunk at a Group of Seven meeting in Rome.