The Bank of Japan will consider cutting interest rates for the first time in seven years this week when it assesses the impact of a global financial storm on Japan's brittle economy, a source with knowledge of the matter said on Wednesday.
The BOJ, which declined to join the U.S. Federal Reserve and other central banks in a coordinated rate cut this month, will monitor global markets before deciding whether to pull the trigger on Friday, the source said, speaking on the customary condition of anonymity.
The Fed is expected to cut its benchmark by 50 basis points on Wednesday as part of a global scramble among policy makers to contain a crisis that has destroyed banks from Wall Street to Iceland and now threatens the world with recession.
The source did not comment on the size of any rate cut in Japan. The Nikkei business daily reported on Wednesday without citing sources that the Bank of Japan was leaning towards a 25 basis point cut to its benchmark, the unsecured overnight call money rate which is now at 0.5 percent.
With its interest rates so low, the BOJ has been reluctant join the global push to ease policy, preferring to keep its powder dry for an emergency in the domestic economy that was largely shielded from the initial waves of the crisis.
"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.
YEN TUMBLES
Expectations of a rate cut pushed the Nikkei share average, which had fallen to a 26-year low this week, up 7.7 percent on Wednesday.
Helped by the Nikkei report, the yen tumbled against the dollar on Tuesday, though it climbed back on Wednesday to trade around 96 yen, close to a 13-year peak.
Comments from Japanese policymakers have begun to suggest that the kind of domestic economic crisis the central bank was waiting for may be at hand.
"There is a risk that global market and economic conditions could worsen further and affect Japan's economy," BOJ Deputy Governor Kiyohiko Nishimura told a parliamentary panel on Wednesday.
Japan began to feel the full force of the crisis this month. The stock market crashed, losing a third of its value in around three weeks, putting the skids under Japan's largest banks, which had largely avoided the credit market losses of Western rivals.
Three of the largest banks are looking to replenish capital lost on stock market investments, and exporters are bracing for the impact of the yen rally, which would pummel demand for their goods in Western markets lurching toward recession.
Japan's industrial output fell 1.2 percent in July-September for the third straight quarter, the longest sequence of declines since a four-quarter run in 2001, when Japan was in recession.
The Nikkei said the BOJ will cut its forecast for Japanese economic growth to almost zero from 1.2 percent for the year to March, when it releases its half-yearly economic outlook report on Friday.
The BOJ is also likely to cut its growth forecast for the next fiscal year to 0.5-1 percent from a previous estimate of 1.5 percent, the newspaper said.
SEND A MESSAGE
Any rate cut, the first since the central bank started flooding markets with cash in 2001 to end deflation, would have little impact on the Japanese economy battered by global market turmoil and an export slump, said 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," said Haji.
"Now that the news is out, markets would be hugely disappointed if the BOJ didn't cut rates."
The government is also rushing to prevent Japan's downturn from mutating into a long slump, changing regulations to halt the stock market collapse and preparing a package of economic stimulus measures that will be announced on Thursday.
The package is set to include 2 trillion yen ($20.2 billion) in temporary income tax cuts, a bank bailout scheme and relief for small businesses.
The government is also looking at relaxing accounting rules that force banks to mark assets to their market value, running up huge losses when prices plunge.
Some economists questioned whether the central bank would be ready to move by Friday, however.
"We don't see the Bank of Japan lowering rates this week. The central bank now thinks it is important to provide ample liquidity, including in dollars," said Kyohei Morita, chief economist at Barclays Capital Japan.
