Fearing a recession, Japan cuts rates

Plunging stock prices have fueled fears of a recession in Japan.

By From staff and wire reports

TOKYO, Japan -- The Bank of Japan cut interest rates Wednesday after fresh economic data for January cemented fears of a sharp economic slowdown in Japan.

The central bank's Policy Board lowered the overnight money-market rate to 0.15 percent from 0.25 percent and cut the more symbolic discount rate to 0.25 percent from 0.35 percent.

The move followed the release of data showing a 3.9 percent slump in industrial production for January. The BOJ said it acted because Japan was struggling against slowing overseas growth and declining stock prices.

BOJ Governor Masaru Hayami said the decision to cut short-term interest rates was a precaution against Japan falling into a deflationary spiral.

"I believe a 0.1 percentage point cut would have a big impact. Any more than that would have undermined market functions," Hayami told a news conference.

Dramatic confirmation

The industrial output figures provided dramatic confirmation of the unfolding weakness and an impeccable reason for the independent BOJ to cut rates without its action being interpreted as caving in to political demands.

"This morning's data on industrial production gave the Bank of Japan the fundamental data that justified easing monetary policy.

As for the timing, waiting until the next meeting in March would have meant a build-up of political pressure," said Koji Shimamoto, chief strategist with BNP Paribas.

James Malcolm, an economist with JP Morgan agreed. "The easing is not entirely a shock given the terrible output data we had this morning," he said.

"Entirely a sensible step"

"Those figures certainly raised the downside risks for the economy, so the BOJ has taken a step closer to zero rates, which is entirely a sensible step," he said.

Economists had been bracing themselves for a soft output report because of weakness in the United States and Asia, Japan's major export markets. But those polled by Reuters had expected on average a rise of 0.1 percent compared with December, adjusted for seasonal variations.

Even the most pessimistic forecast was for a drop of 0.8 percent. In the event, the decline was the steepest in six years.

"The number is not good, not good at all," said Shinya Yasumatsu of the Dai-Ichi Kangyo Research Institute.

More trouble

Just as troubling was a 0.6 percent increase in inventories, following a 0.1 percent drop in December, suggesting that manufacturers will have to cut output further to work off stockpiles of unsold goods.

An official at the Ministry of Economy, Trade and Industry (METI) said the slide was mainly due to sagging exports, the perennial mainstay of the world's second-largest economy.

"The impact of the slowdown in exports is substantial. Exports of cars to North America fell, and the impact of falling production was also seen in a slowdown in exports of electronics goods," the official told reporters.

METI downgraded its assessment of the underlying production trend, which it now says is moving sideways. It forecast a rebound in output of 2.7 percent in February before a renewed decline of 1.4 percent in March.

"METI might say output's moving sideways, but it looks to me as though it's moving down rather fast," said Garry Evans, a strategist with HSBC Securities.

"First sign of slow down"

"It's a very bleak number. It's the first real sign we've got that the Japanese economy is slowing down very substantially."

Adding to the gloom were a deeper-than-expected 11.1 percent fall in housing starts in January from a year earlier and a 12.5 percent decline in construction orders.

The Nikkei 225 average fell 2.11 percent in early afternoon trade to 12,784.17, its lowest since December 10, 1985, as investors shortened the odds of a return to recession after a decade of slow, on-and-off growth.

The Nikkei later pared its losses, but still closed 1.35 percent lower, while bond prices -- which thrive on economic weakness -- rose sharply.

"The risk of Japan going back into outright recession is a very real risk," Evans said.

Reuters contributed to this report.

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