Published November 1, 2008
Japan disappoints with grudging cut
BOJ slashes policy lending rate to 0.3%, its first in 7 years in bid to fend off recession
By ANTHONY ROWLEY IN TOKYO

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THE Bank of Japan's policy board made a grudging gesture towards concerted global monetary easing yesterday by agreeing to lower its policy lending rate by just 200 basis points to 0.3 per cent, and then only after BOJ governor Masaaki Shirakawa used his casting vote to break a deadlock over how big the cut should be. The yen resumed its rise and Tokyo stocks fell again as markets signalled apparent disappointment with the move.

MR SHIRAKAWAThe Japanese central bank governor used his casting vote in helping to push through a smaller-than-expected interest rate cut. Tokyo stocks fell again as markets showed apparent dismay with the move
Central banks in the Eurozone, Britain and Australia are all expected to cut rates further next week but a more positive gesture from Japan would have been welcome, some analysts said, especially as the BOJ painted a gloomy picture of global economic prospects after its policy board meeting.
'Particularly close attention should be paid to the risk of downward deviation in economic activity due to developments in the US and European financial systems and global financial markets as well as their subsequent impact on the real economy,' said the BOJ.
'If strains in financial markets intensify further, the risk-taking capacity of financial institutions and investors may decline and this could result in even tighter financial conditions and a worsening negative feedback loop between financial markets and the real economy, causing lower economic growth in the United States and Europe.'
Japanese Prime Minister Taro Aso's emergency fiscal package announced on Thursday, which included 5 trillion yen (S$75.7 billion) in new spending, provoked disappointed reactions yesterday. He was criticised for announcing tax cuts while warning that Japan's consumption tax would be raised in three years time thus discouraging consumers from spending.
Meanwhile, renewed gloom gripped Asian stock markets as they closed what is set to be their worst overall month ever, as the financial and economic crisis continues to unfold. News that the US economy contracted by 0.3 per cent in the third quarter of this year, joining Japan's on a road to recession that European economies also appear set to go down, weighed heavily.
Although the BOJ's 0.5 per cent overnight lending rate left the Japanese central bank with little room to make a cut on anything like the scale that other leading banks are being forced to implement, markets had hoped for a bolder gesture from Tokyo. A cut to at least 0.25 per cent and perhaps beyond had been assumed, to stem the unwinding of yen carry trades on recent surges in the currency.
Japan's former vice-finance minister for international affairs Eisuke Sakakibara said yesterday that he 'would not be surprised to see the unwinding of carry trades (which he estimated at up to US$1 trillion in value) resuming' and that the yen was likely to see a fresh bout of strength in the short term.
Analysts speculated after yesterday's widely watched BOJ meeting that the bank could be forced to cut rates again, perhaps to zero, if conditions worsen. 'The world economy will face the most severe situation towards March and lean to further credit easing,' said Nomura Securities chief economist Takahide Kiuchi. 'The BOJ will need to take a further step towards monetary easing to prevent the yen's rise and stock falls.'
Tokyo's benchmark Nikkei 225 stock average fell by 5 per cent or 452.78 points to 8,576.98 yesterday while the yen rose to 97.38 yen after falling to 99.13 yen on Thursday. The yen also strengthened against the euro, with both moves adding to market concerns that Japan's export led growth cannot be resumed until either the yen drops or external demand improves.
Compounding market gloom, Mizuho Financial Group yesterday became the second major Japanese bank this week to cut its full-year net profit forecast by more than half because of bad loans and losses in its equity portfolio.
Mr Sakakibara, speaking at the Foreign Correspondents club of Japan in Tokyo warned that many of Japan's smaller banks could face problems if the Nikkei moved below 7,000 again, as it did recently, because of their use of equity gains in their capital base. He predicted that the global economic slowdown could persist for up to three to five years, and added that there is 'no panacea' to turn the situation around.