UPDATE 6-BOJ considering interest rate cut - source
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TOKYO, Oct 29 (Reuters) - The Bank of Japan will consider cutting interest rates at a policy meeting later this week, but the bank will watch market conditions before making a final decision, a source informed on the matter said on Wednesday.
Financial markets had not been expecting a rate cut, but BOJ officials said recent steep falls in Japanese share prices and a surge in the yen that batters exports were worrying given that the economy was already fragile.
The BOJ policy board will take up the rate cut option when it meets on Friday, the source said.
BOJ Deputy Governor Kiyohiko Nishimura told a parliamentary panel that downside risks for Japan's economy were growing.
"There is a risk that global market and economic conditions could worsen further and affect Japan's economy," he said.
Hopes of a rate cut pushed the Nikkei share average, which had fallen to a 26-year low this week, up more than 7 percent after a more than 6 percent rise on Tuesday.
The BOJ's policy meeting will come two days after the U.S. Federal Reserve makes its own rate decision on Wednesday. A U.S. cut of at least 50 basis points from a 1.5 percent target now is widely expected. The European Central Bank and the Bank of England are also seen cutting rates early next month.
"I think it is getting difficult for the BOJ to distance itself from the international coordination," said Naomi Hasegawa, a senior strategist at Mitsubishi UFJ Securities.
"The BOJ will have to cut interest rates now that markets are expecting it. The bank will have no other choice," she said.
The Nikkei business daily reported on Wednesday without citing sources that the central bank was leaning towards cutting its 0.5 percent target rate for the unsecured overnight call money rate to 0.25 percent.
SENDING A MESSAGE
Analysts worry that recent sharp stock price falls could pressure Japan's financial system -- so far widely seen as in much better shape than those of the United States and Europe -- because the country's banks hold a lot of Japanese shares.
The yen's rise to a 13-year high late last week also fuelled concern that exports, the main engine of the economy, will falter because a strong yen saps the competitiveness of Japanese goods abroad at a time when global demand is already slowing sharply.
The yen edged up on Wednesday after suffering one of its biggest drops against the dollar ever the previous day.
Economics Minister Kaoru Yosano said on Tuesday that a cut in Japan's rock-bottom rates would have no effect on the economy, but would have a symbolic significance. Economists agreed.
"Although cutting rates might not have much stimulative effect on the economy, it's hard for the bank to continue resisting action when financial markets are so unstable," Koichi Haji, chief economist at NLI Research Institute.
"Still, a rate cut would send a message to the world that Japan is cooperating with other nations in tackling the financial crisis," he said. "Now that the news is out, markets would be hugely disappointed if the BOJ didn't cut rates."
A BOJ rate cut would be the first since the central bank started its quantitative easing policy of flooding markets with cash in 2001.
Adding to the worry for Japan's economy, industrial output fell 1.2 percent in July-September from the previous quarter, the third straight quarter of declines, data showed on Wednesday.
That marks the longest such sequence since four consecutive quarters of decline in 2001, when Japan was in recession.
Manufacturers' output, the core component of production, is expected to fall 2.3 percent in October and decrease 2.2 percent in November, the government data showed.
The Nikkei newspaper report said the BOJ's half-yearly economic outlook report, also due on Friday, is expected to include a downgrade in the economic growth rate projection for fiscal 2008/09 to nearly zero percent from 1.2 percent.
The BOJ is also likely to cut its growth forecast for fiscal 2009/10 to 0.5-1 percent from a previous estimate of 1.5 percent, the newspaper reported.
The BOJ has so far said the economy will stagnate at least until early 2009 but eventually gradually recover moderate growth.
Financial markets had not been expecting a rate cut, but BOJ officials said recent steep falls in Japanese share prices and a surge in the yen that batters exports were worrying given that the economy was already fragile.
The BOJ policy board will take up the rate cut option when it meets on Friday, the source said.
BOJ Deputy Governor Kiyohiko Nishimura told a parliamentary panel that downside risks for Japan's economy were growing.
"There is a risk that global market and economic conditions could worsen further and affect Japan's economy," he said.
Hopes of a rate cut pushed the Nikkei share average, which had fallen to a 26-year low this week, up more than 7 percent after a more than 6 percent rise on Tuesday.
The BOJ's policy meeting will come two days after the U.S. Federal Reserve makes its own rate decision on Wednesday. A U.S. cut of at least 50 basis points from a 1.5 percent target now is widely expected. The European Central Bank and the Bank of England are also seen cutting rates early next month.
"I think it is getting difficult for the BOJ to distance itself from the international coordination," said Naomi Hasegawa, a senior strategist at Mitsubishi UFJ Securities.
"The BOJ will have to cut interest rates now that markets are expecting it. The bank will have no other choice," she said.
The Nikkei business daily reported on Wednesday without citing sources that the central bank was leaning towards cutting its 0.5 percent target rate for the unsecured overnight call money rate to 0.25 percent.
SENDING A MESSAGE
Analysts worry that recent sharp stock price falls could pressure Japan's financial system -- so far widely seen as in much better shape than those of the United States and Europe -- because the country's banks hold a lot of Japanese shares.
The yen's rise to a 13-year high late last week also fuelled concern that exports, the main engine of the economy, will falter because a strong yen saps the competitiveness of Japanese goods abroad at a time when global demand is already slowing sharply.
The yen edged up on Wednesday after suffering one of its biggest drops against the dollar ever the previous day.
Economics Minister Kaoru Yosano said on Tuesday that a cut in Japan's rock-bottom rates would have no effect on the economy, but would have a symbolic significance. Economists agreed.
"Although cutting rates might not have much stimulative effect on the economy, it's hard for the bank to continue resisting action when financial markets are so unstable," Koichi Haji, chief economist at NLI Research Institute.
"Still, a rate cut would send a message to the world that Japan is cooperating with other nations in tackling the financial crisis," he said. "Now that the news is out, markets would be hugely disappointed if the BOJ didn't cut rates."
A BOJ rate cut would be the first since the central bank started its quantitative easing policy of flooding markets with cash in 2001.
Adding to the worry for Japan's economy, industrial output fell 1.2 percent in July-September from the previous quarter, the third straight quarter of declines, data showed on Wednesday.
That marks the longest such sequence since four consecutive quarters of decline in 2001, when Japan was in recession.
Manufacturers' output, the core component of production, is expected to fall 2.3 percent in October and decrease 2.2 percent in November, the government data showed.
The Nikkei newspaper report said the BOJ's half-yearly economic outlook report, also due on Friday, is expected to include a downgrade in the economic growth rate projection for fiscal 2008/09 to nearly zero percent from 1.2 percent.
The BOJ is also likely to cut its growth forecast for fiscal 2009/10 to 0.5-1 percent from a previous estimate of 1.5 percent, the newspaper reported.
The BOJ has so far said the economy will stagnate at least until early 2009 but eventually gradually recover moderate growth.
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