Japan could follow the United States in cutting interest rates this week, a source with knowledge on the matter said, in the latest steps to protect the world’s two largest economies from the global financial crisis.
The Bank of Japan will consider cutting rates at a policy meeting on Friday but will watch market conditions before deciding, the source told Reuters on Wednesday. Bets on a quarter-point cut to 0.25% snapped the recent surge in the yen, which has hurt exporters and helped hammer Japanese shares. The Federal Reserve is widely expected to cut US rates by at least half a point on Wednesday to 1%, the lowest level since June 2004. The European Central Bank and the Bank of England are expected to follow suit next week.
The prospect of a round of global rate cuts helped lift both the Dow Jones industrial average and S&P 500 indexes for their second-biggest points gains ever on Tuesday. Japan’s Nikkei share average, which fell to a 26-year low this week, set the tone on Wednesday for most of Asia’s stock markets with a 7.7% rise that built on Tuesday’s gain of more than 6%.
The dollar soared more than 6% against the yen on Tuesday, it’s biggest one-day gain since 1974, as news of a possible Bank of Japan rate cut emerged. It gave back some of the gains on Wednesday. “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.”
A huge rescue package agreed for Hungary underlined the pain the worst financial upheaval in 80 years is causing as policy makers around the world scramble to contain the economic damage. 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. For its part, South Korea said on Wednesday that it had no plans to accept financial support from the IMF because it has enough foreign exchange reserves. The Fed said late on Tuesday that it had established a $15 billion temporary currency swap line with New Zealand to address pressures in US 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 and more plans for corporate layoffs 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% in September, beating forecasts, but the Ministry of Economy, Trade and Industry predicted a significant fall in core manufacturing output in October and November. US consumer confidence plunged in October to the lowest in the 40-year history of the survey, and economists polled by Reuters expect US gross domestic product figures on Thursday to show a 0.5% decline in July-September.
Japan’s Sony Corp, which last week cut its annual operating profit forecast by 57% in the face of a global downturn, said on Wednesday quarterly profits at the electronics and entertainment group slumped 90%. Nippon Steel Corp, the world’s second biggest steelmaker, booked a 13% fall in quarterly profit but expectations for a punishing global downturn means the outlook is increasingly tough.
Time Warner Inc’s Time Inc the world’s largest magazine company, said it plans a restructuring that could lead to as many as 600 job cuts, or about 6% of its work force, to cope with the financial crisis. The prospect of a prolonged global recession makes it likely that stocks have not found their bottom yet, despite the gains over the past two days, some analysts say. Commodity prices have been rising along with equity markets, but rallies have been modest given increasing evidence that the US and Chinese economies are slowing rapidly.
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 stabilize 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.” (Reuters)