Japan May Cut Rates, IMF Provides Loan to Hungary

Japan signaled on Wednesday it could follow the United States in cutting interest rates this week to protect the world's two largest economies from the global financial crisis.

A huge rescue package for Hungary underlined the pain the worst financial upheaval in 80 years was causing as policymakers around the world scrambled to contain the economic damage.

The Bank of Japan will consider cutting rates at a policy meeting on Friday but will watch  market conditions before deciding, according to a source informed on the matter.

Bets on a quarter-point cut to 0.25 percent snapped the recent surge in the yen, which has hurt exporters and helped hammer Japanese shares.

The Federal Reserve cut U.S. rates by half a point on Wednesday to 1 percent, the lowest level since June 2004. 

Japan's Nikkei 225 Average , which fell to a 26-year low this week, set the tone for the region's stock markets with a 6.4 percent jump during the morning session that built on Tuesday's gain of more than 6 percent.

The rally followed gains on Wall Street, which buoyed by Fed rate cut hopes, had its second-best day ever on Tuesday.

"Although cutting rates might not have much stimulative effect on the economy, it's hard for the bank to continue resisting action when financial markets are so unstable," said Koichi Haji, chief economist at NLI Research Institute in Tokyo.

"Still, a rate cut would send a message to the world that Japan is cooperating with other nations in tackling the financial crisis," he said. "Now that the news is out, markets would be hugely disappointed if the BOJ didn't cut rates."
     
Hungary Bailout

Governments have pledged about $4 trillion to support banks and restart money markets to try to stem the crisis set off by the bursting of the bubble in the U.S. housing market, but a growing number of governments have had to look for help of their own as the financial woes ripple outwards.

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In the latest sign of the extent of the damage, the International Monetary Fund, the European Union and World Bank agreed to a $25.1 billion economic rescue package for Hungary.

The IMF will lend Hungary $15.7 billion, while the European Union stands ready with an additional $8.1 billion in financing and the World Bank another $1.3 billion.

The IMF is lending Hungary more than 10 times its quota, or subscription, in the fund -- way above the usual limit of three times for countries in trouble.

"The Hungarian authorities have developed a comprehensive policy package that will bolster the economy's near-term stability and improve its long-term growth potential," IMF Managing Director Dominique Strauss-Kahn said in a statement.

"At the same time it is designed to restore investor confidence and alleviate the stress experienced in recent weeks in the Hungarian financial markets," he added.

The agreement comes after Iceland, a high-profile victim of the global credit crisis, raised interest rates by 6 percentage points to 18 percent in an attempt to defend its currency.

Iceland has been driven close to collapse by bank failures, and the central bank said the dramatic rate rise was part of a deal struck with the IMF for a $2 billion loan.

The Fed said late on Tuesday that it had established a $15 billion temporary currency swap line with New Zealand to address pressures in U.S. dollar short-term funding markets, the latest in a number of such swap lines.

Even with such government efforts, the financial crisis could reduce the hedge-fund industry to as little as a third of its current size, billionaire investor George Soros said on Tuesday.

"The hedge-fund industry is going to move through a shakeout," Soros, one of
the world's first hedge-fund managers and still among the best known, said.
     
Determined On Growth

Economic data pointed to a rocky road ahead, even if regulators manage to get to grips with the financial crisis.

In Japan, industrial output rose 1.2 percent in September, beating forecasts, but the Ministry of Economy, Trade and Industry predicted a significant fall in core manufacturing output in October and November.

U.S. consumer confidence plunged in October to the lowest in the 40-year history of the survey, and economists polled by Reuters expect U.S. gross domestic product figures on Thursday to show a 0.5 percent decline in July-September.

British finance minister Alistair Darling urged governments to work as zealously to support their economies as they have to combat a collapse of the world's financial system.

"Three weeks ago, we worked with other countries to put in place a plan to stabilise the banking system," Darling said in extracts from a speech he is to deliver later on Wednesday.

"And today we need the same determination to support the wider economy, to ensure that fiscal policy supports monetary policy, here and across the world, in these exceptional circumstances."

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