Japan tried to push back the waves of the financial crisis on Tuesday, joining the United States and Europe in restricting investor bets on falling share prices and attempting to talk down a surging yen, an added worry for an economy already teetering on the brink of recession.
Economics Minister Kaoru Yosano played down the need to cut interest rates, arguing that reducing a benchmark rate that is already low at just 0.5 percent would do little for either the currency or the world's second-biggest economy.
The Bank of Japan reviews rates on Friday.
Japan's Nikkei average dropped more than 2 percent to a 26-year low below 7,000 points, but that proved a trigger for buyers who prompted a dramatic turnaround in the index to leave the closing level up more than 6 percent on the day.
Reflecting growing concern over Japan's volatile markets, Finance Minister Shoichi Nakagawa said the government would ban so-called naked stock short-selling from Tuesday.
This is a tactic where traders effectively sell stocks they don't yet own and without borrowing them first, in the hope of profiting by buying them back at a lower price.
"Similar restrictions have already been put in place in the United States and Europe but Japan has lagged behind," Nakagawa said. "A lag of a few days is critical for the Tokyo stock market."
Investors are still allowed to sell short as long as they have borrowed stock against the position.
YEN LEAP
The yen has leapt about 20 percent on a trade-weighted basis this month alone as investors unwound carry trades, a phenomenon of Japan's low interest rates, in which they borrowed yen to finance investments in higher-yielding assets.
"The yen's rise in the past week is astonishing, but it does not reflect Japan's economic fundamentals. It is caused by unwinding of yen carry trades and selling by investment funds," Yosano told a news conference after a cabinet meeting.
The Group of Seven rich nations warned on Monday that the yen's wild swings threatened financial stability, stirring speculation of a Japan rate cut and central bank intervention to curb the currency's rally.
"The G7 would take the same stance if any other currency showed such excessive moves," Yosano said of the rare statement.
On Tuesday, the Japanese currency slipped back, as caution grew about the prospect of intervention and as some market players took profits on last week's surge. At 0740 GMT, the currency was changing hands at 94.70 per dollar.
Although currency traders remained nervous at the possibility of intervention, Nakagawa would not be drawn on the issue.
Analysts said Japan's G7 partners would have little appetite for intervention amid the financial crisis. Instead, Japan would have to go it alone but was also unlikely to step into the market unless the yen rises beyond 90 per dollar.
Major Japanese exporters have been hit by the surge in the yen, which reduces the value of their overseas sales.
Honda Motor Co, Japan's No.2 automaker, cut its annual operating profit forecast by 13 percent on Tuesday, due partly to the yen's rise, while Sony Corp halved its operating profit forecast last week.
NO RATE CUT EXPECTED
Tightening short-selling rules was part of steps outlined by the government to ease the strain on banks, which have heavy exposure to domestic equities.
They have little exposure to the risky credit instruments that crippled Wall Street, but investors fear lenders' extensive shareholdings and rising bad-loan costs will shred their profits.
Government efforts to stabilise markets have provided little respite. The Nikkei rose on Tuesday but the benchmark has lost half its value so far this year, much bigger than the Dow Jones industrial average, which is down less than 40 percent.
Major central banks earlier this month cut interest rates in an unprecedented co-ordinated move to contain the damage from a credit rout set off by the U.S. subprime meltdown 15 months ago.
But the Bank of Japan opted out, saying rates in Japan were already very low. Economics minister Yosano suggested the view had not changed.
"It may be an important proof of international cooperation if Japan lowers rates when other central banks cut them," he said.
"But when you think about the real economy, I don't think a rate cut to 0.25 percent from 0.5 percent would suddenly reverse the flow of money or boost corporate appetite for capital spending."
The BOJ is widely expected to keep its key policy rate unchanged at a review on Friday and revise down its economic forecasts in a semi-annual economic and price outlook report.
Money market futures are pricing in about a 40 percent chance of a rate cut by the end of this year, up from 30 percent seen in previous day.
