BOJ follows lead, cuts interest rates

By Alex Frew McMillan
CNN Hong Kong

TOKYO, Japan (CNN) -- The Bank of Japan cut interest rates Tuesday and said it would pump more cash into the country's economy.

The BOJ said it would cut the discount rate to 0.10 percent, from 0.25 percent. But the cut is essentially symbolic, with interest rates already virtually at zero in Japan.

It met Tuesday under heavy pressure to help out the world's second-largest center of business, in the wake of the U.S. attacks.

In Tokyo, the Nikkei stock index ran up almost 2 percent ahead of the move. It closed up 1.85 percent at 9,679.88.

The central bank's decision was widely anticipated, mimicking similar rate cuts around the world.

The ease of the decision was shown by the BOJ's call to scale back its meeting, which started and finished Tuesday. It was originally slated to run two days.

But experts are skeptical about how much the BOJ action will help.

Political pressure to act

The government had pressed the BOJ to act. Japan's Economics Minister, Heizo Takenaka, said he would push at the meeting the cabinet's view that more "quantitative easing" was necessary, something other ministers also advocated.

Though the BOJ is independent in Japan, it comes under heavy political pressure from the government. Politicians recently drafted legislation to limit its powers, frustrated it wasn't doing enough to help Japan out of its decade-long trough.

The BOJ also said it would raise bank reserves held in the current account at the BOJ above the current 6 trillion yen.

It did not say how much it would raise them, however. The BOJ started targeting reserves this spring as a way of making sure there is more cash in the system, to make banks more aggressive with their loans.

Little payoff

So far that policy has had little payoff. It's a different tack from the approach central banks typically take. The U.S. Federal Reserve normally just tackles interest rates.

The BOJ last raised bank reserves on August 14, a move that shocked markets. It also vowed to buy more JGBs.

Japan's markets have continued to slump since then, and its economy has yet to show any sign of improving. It is almost certain to enter recession when its next set of gross domestic product figures come out.

Analysts say there is little more it can do to spark a recovery in Japan.

Central banks responding fast

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

The U.S. Fed 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.

Japan faces heavy toll

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.

Investors were waiting to get further guidance from U.S. markets with this Tuesday's trading. Life is still very much not back to normal for the financial world.

Experts say it is hard to pinpoint the ultimate results of an unprecedented terrorist attack, which led to an unprecedented shutdown of air travel in and to the United States, and the longest Wall Street hiatus since World War I.

Japan is expected to face the heaviest toll in Asia. 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.