Bank of Japan Considers Cutting Rates

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.

A reduction in interest rates is seen coming up on the table when the BOJ's policy board meets on Friday, as the recent plunge in Tokyo shares and jump in the yen threaten an already fragile Japanese economy.

Japan's Nikkei 225 Average has fallen to a 26-year low this week and has lost more than 50 percent since the start of the year.

This 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 Japanese export industries, the leading engine of the economy, will falter as a strong yen further saps their competitiveness at a time when global demand is already slowing sharply.

The Nikkei business daily also reported earlier on Wednesday without citing sources the central bank is leaning towards cutting its 0.5 percent target rate for the unsecured overnight call money rate to 0.25 percent.

The yen slid further from its highs after the report, posting its biggest percentage fall versus the dollar since 1974, tumbling more than 5 percent.

Financial markets had not been expecting a BOJ rate cut. Swap contracts were pricing in only around a 10 percent chance of a rate cut this week late on Tuesday.

The BOJ's policy meeting will come two days after the U.S. Federal Reserve's rate-setting decision, where a cut of at least 50 basis points from the current 1.5 percent target is widely expected.

The European Central Bank and the Bank of England are also seen cutting rates early next month.

Industrial production in Japan fell 1.2 percent in July-September from the previous three
months, marking the third straight quarter of declines and this seems to provide yet more evidence that Japanese manufacturers' production is losing steam.

Output rose 1.2 percent in September from a month earlier, above a median market forecast for a 0.5 percent gain. But manufacturers' output, the core component of production, is expected to fall 2.3 percent in October and decrease 2.2 percent in November, data from the
Ministry of Economy, Trade and Industry showed on Wednesday.

The Nikkei 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 it will eventually gradually recover to moderate growth.

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