The Bank of Japan may announce next week that it will start paying interest on reserves lenders deposit at the central bank to counter the global financial turmoil, Morgan Stanley said.
"The BOJ is likely to team up with other central banks to expand liquidity provisions in the runup to the yearend when funding supply and demand tightens," Takehiro Sato, chief Japan economist at Morgan Stanley in Tokyo, wrote in a report Tuesday. "This may mean more urgent consideration of interest payments on reserves," and the BOJ may announce the plan on Oct. 31, when it releases its economic outlook.
The step would discourage lenders from hoarding cash and help the BOJ provide more funds without worrying about the overnight lending rate falling below its target of 0.5 percent. The Federal Reserve adopted the step Oct. 6, and BOJ Gov. Masaaki Shirakawa said last week he ordered his staff to hammer out a similar plan as soon as possible.