A divided Bank of Japan cut interest rates for the first time in seven years on Friday, under government pressure to join the global response to the worst financial crisis in 80 years.
On the vote of the governor after a 4-4 split on the policy board, the central bank trimmed its key interest rate to 0.3 percent from a decade-high 0.5 percent, despite knowing the reduction would have little economic impact as Japan feels the pain from the financial crisis.
The central bank also cut its economic outlook saying the strains in global markets had increased and the world economy faced severe conditions for some time.
The markets had widely expected a cut to 0.25 percent and Yuji Saito, head of fx sales at Societe Generale in Tokyo, said the split decision and smaller cut may send the wrong signal.
"Today's decision may give an impression to foreign investors that the Bank of Japan will not be able to manage rate decision flexibly," he said.
In a sign of political pressure on the central bank to move, Finance Minister Shoichi Nakagawa said earlier on Friday the BOJ must work closely with the government.
"I want the government and the BOJ to cooperate closely in policy management and have a shared understanding of the current state of the economy and financial markets," he told reporters.
It was not immediately clear what the four BOJ policy board members who opposed the cut had wanted instead.
The rate cut comes two days after the U.S. Federal Reserve cut rates by 0.5 percentage point to 1 percent.
China, Hong Kong and Taiwan also cut rates this week, with the European Central Bank and Australia seen following suit next week, in the midst of a sharp deterioration in major economies.
"A harsh storm seen only once in 100 years is raging," Prime Minister Taro Aso said on Thursday, as he unveiled a $51 billion stimulus package — the government's second in two months.
Looming large at the BOJ meeting was volatility in financial markets, which have taken Japanese shares to their lowest levels in 26 years this week and pushed up the yen to a 13-year high against the U.S. dollar last week.
The yen gained against the dollar and Japanese government bond futures trimmed losses after the rate cut. The dollar dropped almost half a yen to 98.00 yen while December JGB futures trimmed losses to around 137.90 from around 137.07.
Perhaps strengthening the case for a rate cut was a dip in annual inflation to 2.3 percent as oil prices have plunged from record highs in July.
Previously, the BOJ has been reluctant to join the global push to ease monetary policy as it regarded rates as low enough.
A gradual retreat in Japanese inflation from decade highs would allow the central bank to concentrate on economic risks, with it tipped to slash growth forecasts later on Friday.
The central bank's board members are expected to forecast growth of only around 0.5 percent or less in both 2008/09 and 2009/10, less than half its previous forecasts in July of 1.2 percent and 1.5 percent, respectively.
