Rate cut on cards as Bank of Japan due to meet

Rate cut on cards as Bank of Japan due to meet
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First Published: Thu, Dec 18 2008. 11 16 AM IST
Updated: Thu, Dec 18 2008. 11 16 AM IST
Tokyo: The Bank of Japan will begin a two-day policy meeting on Thursday amid growing speculation that it may follow the United States in cutting interest rates after the yen soared against the dollar.
The US Federal Reserve slashed rates to virtually zero on Tuesday, bringing the cost of borrowing in the world’s largest economy below the 0.3% in Japan, which for years had the world’s lowest level.
In Thursday morning trade in Tokyo, the dollar was quoted at ¥87.30, just off a 13-year low of ¥87.11 in New York on Wednesday.
The dollar was also languishing against the euro, which on Wednesday posted its strongest gain against the greenback since the single European currency was launched in 1999.
Lower interest rates often weaken a currency by making it less lucrative. But the soaring yen hurts Japanese exporters, already suffering from the global downturn, by making their exports more costly.
“I personally think that the BoJ will cut its rate to 0.1% after the yen rose to lower 87 ¥ levels,” said Norio Miyagawa, economist at Shinko Research Institute.
Japanese government officials have made little secret they would welcome a rate cut by the central bank, which is independent but has often faced political pressure on how to steer the world’s second largest economy.
Miyagawa said there was still a possibility the central bank would not take action on rates. Until recently, the BoJ had aimed to gradually raise rates to stop investors from bingeing on Japan’s cheap credit.
Japan’s economy shrank 0.5% in the three months to September, entering its first recession in seven years.
Companies have slashed thousands of jobs as export markets dry up. Honda Motor Co. on Wednesday sharply cut its earnings forecast for the year.
In October, the Bank of Japan joined a wave of global rate cuts by lowering its benchmark level from 0.5% to 0.3%. It was its first cut in seven years.
The Japanese central bank has also pumped huge amounts of cash into the financial system since the global credit crunch erupted.
But Finance Minister Shoichi Nakagawa earlier this week urged the central bank to do more, saying that “nobody denies the Japanese economy is sagging.”
Nakagawa has also left open the possibility that Japan would intervene in markets to bring down the yen, a step the country has not taken for nearly five years.
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First Published: Thu, Dec 18 2008. 11 16 AM IST