The Bank of Japan played up the risk of global market turmoil and grew more cautious about economic recovery at home today, leaving the door open to an interest rate cut, possibly with other central banks.
The Bank of Japan (BOJ) held its benchmark interest rate at 0.5 per cent, as analysts had expected, but a huge rate cut of 1 percentage point by the Reserve Bank of Australia fuelled speculation of more cuts by major central banks in coordinated fashion.
Markets will now scrutinize Governor Masaaki Shirakawa's news conference for anything that will look like a response to the US call for a coordinated global response to the crisis. His comments are due for release around 4:15 pm today
Investors got little from the statement accompanying the BOJ's decision.
The BOJ maintained its overall assessment, saying the world's second largest economy was "sluggish." But it changed the wording of the statement to say the economy would remain sluggish as "the slowdown in overseas economies become more evident."
"As for risk factors, strains in global financial markets have intensified in the wake of failures and rescues of U.S. and European financial institutions," it said.
It added the phrase "in the longer run" to describe the likelihood of Japan's economy returning to sustainable growth with price stability, suggesting that it is becoming more cautious about the timing of Japan's economic recovery.
"With the change in rhetoric, the BOJ apparently emphasized the stronger risk of a prolonged recession in Japan as the financial market turmoil is now posing greater downside risks for overseas economies and exports from Japan," said Susumu Kato, chief economist at Calyon Securities.
"Given growing downside risks at home and abroad, we cannot rule out the possibility of monetary policy action by the Bank of Japan, especially in a scenario where US and European monetary authorities have to lower interest rates."
Speculation that the Group of Seven (G7) rich nations would agree on a coordinated response, including rate cuts, to the financial turmoil reached fever pitch yesterday and helped Wall Street erase some of its biggest intraday losses on record.
A committee of top financial regulators that President George W. Bush convened to address the crisis said policymakers around the world needed to use all tools available "in forceful and coordinated ways."
Japanese Finance Minister Shoichi Nakagawa said Japan would look to work closely with the rest of the G7 which holds talks on Friday in Washington.
"I'm racking my brains for what Japan can do, while collaborating with other members, because we have our own experiences from the past," he said.
"I understand the G7 meeting comes at a time when we need to work more closely with other countries as well as the central bank domestically."
Japanese banks have largely escaped the worst of the crisis, but bank failures in the United States and Europe are shattering confidence in Japan's export markets, accelerating an economic slump that already bears the hallmarks of a recession.
Japan's economy shrank more than initially estimated in the second quarter to log its worst performance in seven years as exports and capital spending, the main drivers of growth, were hit by the global slowdown.
Reuters