BOJ confronts heavy burden

By Alex Frew McMillan

TOKYO, Japan -- The central Bank of Japan met Tuesday under heavy pressure to help out the world's second largest economy, in the wake of the U.S. attacks.

The BOJ scaled back the session, saying it would also finish Tuesday. It was originally slated to run two days.

The central bank was broadly expected to ease monetary policy, mimicking similar rate cuts around the world.

The government is also pressing it to act. Japan's Economics Minister, Heizo Takenaka, said he would stress again the government's view that the central bank needs to do its part with more "quantitative easing."

Finance Minister Masajuro Shiokawa has also voiced the need for easing.

The government will draw up a list of requests for central-bank policy later Tuesday, Takenaka said.

"It is however, up to the BOJ to make a final decision on monetary policy," he said.

The central bank is independent in Japan, but often faces heavy political pressure from the government.

Rate cut would be symbolic

Some politicians had already drawn up legislation to curb its powers when they felt it was not doing enough to help Japan's slump.

A cut in the discount rate would be essentially symbolic, with interest rates already virtually at zero in Japan.

The BOJ could also inject more money into the economy by promising to buy more Japanese Government Bonds (JGBs).

It shocked markets on August 14 when it raised bank reserves and vowed to buy more JGBs. Analysts say there is little more it can do to spark a recovery in Japan, with cash already in relatively free supply.

Central banks responding fast

But the BOJ also has the lead of almost every major central bank to follow.

The U.S. Federal Reserve stepped in to shore up battered American confidence by cutting interest rates a half percentage point Monday, to 3 percent for the short-term rate.

The move was timed to kick in as trading resumed on Wall Street with a sharp drop. It brought U.S. rates to their lowest since September 1992.

Central banks in Europe and Canada also slashed interest rates on Monday, with the European Central Bank weighing in with a surprise half-point cut.

The ECB has been criticized as slow to respond to the economic downturn. But ECB President Wim Duisenberg said it wanted to act fast in these tough times.

"We want to be an anchor of stability in a very turbulent environment," he said.

Hong Kong matched the U.S. cut on Tuesday, as expected. Taiwan also cut rates a half point, effective Wednesday. The Philippines was holding an emergency meeting of its policy board Tuesday to discuss shaving rates.

The Reserve Bank of Australia, however, elected to leave rates alone at 4.75 percent Tuesday, despite investors' hopes for a cut.

Heaviest toll likely to fall on Japan

The Fed, the BOJ, the ECB and the Swiss National Bank already stepped in to provide billions of dollars of liquidity after last Tuesday's attacks.

Japan is expected to face the heaviest toll in Asia from the terrorist assaults in the United States. Exports make up 11 percent of the country's national output, and 30 percent of its overseas shipments are to the United States.

Those will have to pick up if Japan is to rebound, experts say. But Japan is likely to wallow in recession for some time now, with world demand only likely to stagnate further.

The blow from the collapse of the World Trade Center and the direct hit on the Pentagon is expected to hurt consumer confidence in the United States, which had already started to teeter.

Consumer spending had held up relatively well in the United States. With that last leg removed from the U.S. economy, it is expected to topple into recession, leaving Japan with little to move its economy along.