Japanese rate cut surprises markets

JAPAN HALVED a key interest rate to 0.25 per cent yesterday in an attempt to stimulate its flagging economy - a surprise development which saw the dollar make its biggest one-day gain against the yen for three years.

The decision to cut the so-called "overnight loan target rate" - the rate at which banks lend to one another - was the first major change in monetary policy for three years.

The dollar surged by more than 6 yen to 138.29 yen immediately after the announcement, but later lost some ground as traders worried that the US Federal Reserve could follow Japan's lead and cut rates. The dollar closed in New York at 136.7 yen, down from the day's opening of 137.55 but still 4 yen up on Tuesday.

Most experts were dismissive of market rumours that the Japanese rate cut was part of a concerted effort to lower rates in all the major markets. Economists in the City said the Japanese move was unlikely to affect the Bank of England's decision, which is due at midday today.

Michael Saunders, of Salomon Smith Barney, said: "It is unlikely there will be a concerted move, and even if there were such a move, the UK would probably not be part of it."

But some analysts felt Japan's timing was interesting, following Friday's hints by Alan Greenspan, the US Federal Reserve chairman, of an easier US interest-rate policy, and ahead of Monday's Group of Seven finance officials meeting in London. After the G7 meeting, Gordon Brown, the Chancellor, flies to Japan for meetings about the world's economy.

Masura Hyami, the Bank of Japan governor, said that the central bank would, if necessary, pump money into the troubled Japanese financial system. He added: "The restoration of the financial system, along with economic recovery, are priorities that can't be delayed any longer."

The move came too late yesterday to bolster the Japanese market, where the Nikkei Index closed down 157.95 points at 14,755.54 - amid rumours of heavy derivatives losses at leading Japanese banks.

Fuji Bank, Japan's fifth-largest, called a special press conference to deny rumours that it had lost over 2 trillion yen(pounds 9bn).

Analysts were sceptical about the likely benefits of the Japanese rate cut. Michael Derks at Nomura said the rate cut was "helpful at the margin, but whether it is helpful enough is a separate question."

James Montier at BT Alex.Brown said that the cut was one of the worst things Japan could have done. "It puts amazing pressure back on to Asia," he pointed out.