Tuesday, the Bank of Japan retained its key interest rate, but it decided to expand the range of eligible collateral in order to make funds easily available.

The Policy Board of the central bank unanimously voted to hold the uncollateralized overnight call rate at 0.1%. The decision came in line with economists' expectations. The previous change in interest rates was a 20 basis point cut implemented in December 2008.

The central bank said it will accept loans on deeds to municipal governments as eligible collateral and also broadened the range of eligible collateral for loans on deeds to the government and those with government guarantees.

Despite improvements in issuing conditions for CP and corporate bonds, the BoJ noted that financial conditions remained tight. The BoJ's decision to expand the range of eligible collateral was made with an intention to ensure financial market stability.

The central bank resumed its purchase of stocks held by banks and is examining the specifics of providing subordinated loans to banks. Last month, the central bank raised its monthly government bond purchases.

The Bank will continue to exert its utmost efforts as a central bank to facilitate the return of Japan's economy to a sustainable growth path with price stability, the BoJ said.

The central bank said economic conditions have deteriorated significantly and expects conditions to continue deteriorating for the time being due to a further weakening in domestic private demand. The economy is expected to start recovery from the latter half of fiscal 2009.

Yesterday, Finance Minister Kaoru Yosano told reporters after meeting Prime Minister Taro Aso, that the government intends to compile a new stimulus package worth 2% or more of gross domestic product. New fiscal spending would exceed 10 trillion yen.

Conditions in the domestic economy look fragile. According to BoJ's Tankan Survey released last week, Japanese sentiment among large manufacturers plummeted at a record rate in the first quarter of 2009, with the diffusion index posting a score of minus 58.

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