BOJ Leaves Rates Unchanged, But RBA Cuts Rates to 3%

The Bank of Japan unveiled further steps to ease credit strains Tuesday, as the global financial crisis pushes the world's No.2 economy into its worst postwar recession. The central bank kept interest rates at 0.1 percent by a unanimous vote, as widely expected.

The BOJ said it would expand the range of eligible collateral to include loans on deeds to the government and those with government guarantees. It will also accept loans on deeds to municipal governments as collateral for market operations.

BOJ Governor Masaaki Shirakawa will hold an embargoed news conference later in the day, with his comments expected to come out some time after 4:15 p.m.

Companies have been facing difficulty raising funds despite efforts by the BOJ to revive credit, with those surveyed in the central bank's March tankan corporate sentiment survey saying funding in the market was the tightest ever.

Central banks throughout the world are turning to or contemplating non-conventional measures such as asset purchases to keep credit flowing as the option to cut already low policy rates diminishes, as investors braced for the start of what is likely to be a weak U.S. corporate reporting season.

Global stock markets retreated after a powerful month-long rally following comments from an influential U.S. analyst that bank stocks would underperform and investor George Soros said the U.S. economy faced a long slowdown.

But in a further sign that once-frozen credit markets were thawing, South Korea announced it had picked the financial institutions to manage its first global sovereign bond offering in three years.

With some evidence suggesting the extreme ructions in the world economy were easing, and with interest rates already at record low levels in many countries, debate about what further monetary policy steps will be taken has heated up.

RBA Cuts Interest Rates by 25 Basis Points

Separately, the Reserve Bank of Australia cut interest rates by 25 basis points, to a record low of 3 percent.

Recent optimism that the global economy may be nearing a bottom has been offset by export-sapping strength in the Australian dollar and a worsening jobs market.

"We remain of the view that additional decisive policy moves are required to shore up domestic activity," said Annette Beacher, senior strategist at TD Securities.

In a measure likely to help spur domestic growth, the Australian government said on Tuesday it will build a $31 billion national high-speed broadbank network after rejecting bids in a controversial tender.

South Korea, saddled with high levels of foreign debt and needing to fund large stimulus and support programs, was aiming to raise $2 billion in its first sovereign debt sale since 2006, a person familiar with the matter told Reuters.

Also on Tuesday, South Korea said it planned to extend a deadline for a government guarantee on foreign-currency borrowings by six months to further improve foreign currency liquidity in the financial sector.

Warning Signs

While many investors are beginning to hope that the worst has past, warning signs are still flashing.

Toxic debts racked up by banks and insurers could spiral to $4 trillion, new forecasts from the International Monetary Fund are set to suggest, British daily the Times reported on its website.
Veteran analyst Mike Mayo of Calyon Securities said the banking sector's problems had further to run and said government action may not help as much as expected, sending stock markets lower in the United States and Europe on Monday.

Asian stocks followed suit on Tuesday, with MSCI's measure of Asia Pacific excluding Japan off 1 percent, led by a decline in materials and financial shares.

George Soros also highlighted the trouble facing banks, saying the "banking system as a whole is basically insolvent", and gave a more pessimistic view of the U.S. economy than most economists.

"I don't expect the U.S. economy to recover in the third or fourth quarter, so I think we are in for a pretty lasting slowdown," Soros told Reuters Financial Television.

• Yoshikami: Shocking Earnings — Expect It

Investors are also braced for the start of the first quarter reporting season in the United States, with aluminum company Alcoa results later on Tuesday marking the unofficial start of the season.

First quarter earnings for S&P 500 companies are expected to fall by almost 37 percent versus a year ago, according to data from Thomson Reuters, as global demand slumps.

Copyright 2009 Reuters. Click for restrictions.