Bank of Japan to support markets as state fears economic impact of quake

The Bank of Japan is ready to step in and stabilise the country's financial markets with an injection of up to Y3 trillion (£22.8bn) into the banking system today, as a senior government official admitted the economic impact of the disaster could be "considerable".

Central bank governor Masaaki Shirakawa said after a cabinet meeting yesterday: "We will monitor market conditions and plan to provide markets with a lot of liquidity first thing tomorrow morning." Over the weekend it extended Y55bn to banks in areas hit by the earthquake.

The government has been working hard to minimise the economic fallout, although a mass sell-off is expected in markets around the world today starting at the Tokyo exchange after officials said trading would go ahead. In early trading, shares plunged, with the benchmark Nikkei 225 stock average shedding 556 points, or 5.4 per cent, to 9,698.37.

Yukio Edano, Japan's chief cabinet secretary, said yesterday: "The quake is expected to have considerable impact on a wide range of our country's economic activities."

In the wake of the disaster, several of Japan's largest companies suspended operations and others are expected to follow this week. Carmakers Honda, Nissan and Toyota suspended operations shortly after the earthquake hit, as they feared for employee safety, and Mitsubishi announced yesterday it too had halted production at its three domestic plants. Sony, Suzuki and Fuji Heavy Industries have also taken similar precautions.

Yoshikatsu Nakayama, parliamentary secretary of the Economy, Trade and Industry Ministry, met with members of the Japan Business Federation, in a bid to persuade them to shift production outside of the Tohoku and Kanto regions hit by the earthquake.

The Bank of Japan said over the weekend that it would do its "utmost" to ensure the stability of its domestic markets and has cut a two-day meeting starting today to one day. Analysts predicted that the central bank could step in with a fresh round of quantitative easing, especially if the yen surges. Yet, economists predicted the earthquake would push Japan into a technical recession after its economy had shrunk in the three months to the end of the year, especially if the factories remain closed for any prolonged period.

"The timing of the disaster could not have been much worse," consultancy and research group Capital Economics said, adding the economic costs and impact on the public finances "could be considerable".

The decision to open the Tokyo Stock was announced yesterday after officials held talks with financial regulators and government officials. Financial Services Minister Shozaburo Jimi said the authorities would watch closely to ensure against market manipulation. The Nikkei gave up 1.7 per cent to 10,254 points on Friday, but the full impact of the earthquake was not felt in the financial markets as it hit late in the day. Following the Kobe earthquake in 1995, the Nikkei fell 8 per cent over the following five days, although it then rebounded strongly.

On Friday, futures in the index in Chicago fell to 10,005 but experts feared investor sentiment had worsened since then, adding the index could plunge today. Masaru Hamasaki, senior strategist at Toyota Asset Management told Reuters: "Initially all sectors will be under selling pressure. The Nikkei can drop about 20 percent from a recent high of around 10,900. It could fall below 9,000 in the near term."