Japan halves rates to avert total crisis

RICHARD LLOYD PARRY

Tokyo AND DIANE COYLE

The Bank of Japan halved its official lending rate yesterday to a record low of 0.5 per cent, marking its most determined bid so far to boost the flagging Japanese economy. The announcement, backed up by aggressive intervention to buy dollars, pushed the US currency above 100 (66p) for the first time since January and sent Japanese share prices soaring.

The latest cut, the second in five months, is intended by the bank to avert a full-blown crisis in Japan's debt-laden financial system and prevent a slide back into recession. The move preceded publication of the quarterly ''tankan'', a quarterly Bank of Japan survey of big companies, which revealed that corporate gloom has intensified for the first time in nearly two years.

Masayoshi Takemura, Finance Minister, said the interest rate reduction would help ensure Japan's recovery. Yasuo Matsushita, governor of the Bank of Japan, said strong measures had been necessary to put the economy on a stable footing. ''We sent a strong signal to the financial markets and the nation that we are committed to supporting the economy,'' he said and declined to rule out the possibility of further rate cuts.

The interest rate reduction was welcomed by Robert Rubin, the US Treasury secretary, who said it would contribute to stability in the financial markets. ''We remain prepared to co-operate in exchange markets with our G7 partners,'' he added.

There was no sign of Fed intervention to follow up the Bank of Japan's purchases - put at $2bn to $5bn by dealers - when the New York markets opened. However, Mr Rubin's reminder that central banks co-operated to boost the dollar against the yen as recently as 15 August will help support the currency, analysts said. The dollar bobbed around the 100 level throughout the day. It was the first time since January that it had held above this psychological barrier overnight.

Analysts were impressed by the Japanese authorities' new sense of urgency about the economy and financial system. ''The problems have galvanised financial leaders to come to Japan's and the world's rescue, and for the time being it looks like succeeding,'' said Stuart Parkinson, international economist at Deutsche Morgan Grenfell in London.

However, some were cautious about how long the dollar's recovery, essential for Japanese exporters, will last. Saburo Sano at New Japan Securities, said: ''There will be some pitfalls. The budget debate in the US is one thing that could push the dollar lower again.''

Japan's rate of growth has been too close to zero for nearly four years now, and a long-anticipated recovery has been stifled by the soaring value of the yen on foreign exchange markets. On top of that, the banking system bears a bad debt burden estimated at more than 50,000bn. Last week a regional bank and the country's largest credit union were liquidated by regulators.

The announcement of yesterday's cut was followed by publication of the depressing ''tankan'' report which highlighted weak domestic demand, declining manufacturing prices and over employment.

''Tankan reflected the continued standstill of economic recovery since early spring'' - the time of the Bank of Japan's last interest rate cut - said Kunihiko Takeshima, the Bank's director of research and statistics. ''The standstill may last longer than was expected earlier as companies remain cautious.''

A report by the government's Economic Planning Agency, due out next week, will confirm that economic stagnation has worsened. The rate cut was welcomed by business leaders, and the Nikkei-225 index soared nearly 4 per cent to a seven month high of 18,280.

But economists said the interest rate cut alone would not revive the economy.

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