TOKYO, October 31 – Japan Friday joined a growing number of major central banks in cutting key interest rates to pump up their flagging economies amid deepening fears of a global recession.
The Bank of Japan (BoJ) warned Asia\’s largest economy would barely grow this year because of the financial crisis as it cut its already super-low rates for the first time in seven years.
"Adjustments in the world economy stemming from financial crises in the United States and Europe have further increased in severity," the bank said in a statement as it reduced its key lending rate by 20 basis points to 0.30 percent.
"Increased sluggishness in Japan\’s economic activity will likely remain over the next several quarters."
The Japanese economy shrank in the second quarter of this year and a slew of gloomy data since then has reinforced fears of a prolonged downturn.
The BoJ slashed its economic outlook, predicting tepid growth of 0.1 percent in the current financial year to March and 0.6 percent next year.
The rate cut was slightly smaller than markets had expected and failed to halt a slide in Japanese shares, with Tokyo\’s Nikkei stock index closing down 5.01 percent as investors took profits after three days of gains.
Hong Kong share prices were down 5.17 percent in the afternoon session and Chinese stocks slid 1.56 percent by midday after more listed firms posted weak third-quarter profits.
"The rally is seen to be over," said Francis Lun, general manager at Fulbright Securities in Hong Kong. "It\’s time to take profit."
Elsewhere in Asia, Singapore shares recovered from early losses to gain 1.26 percent at midday while Australian stocks closed up 0.4 percent and in Seoul prices closed 2.6 percent higher.
Gloomy data in the United States — which showed the economy contracted at a 0.3 percent annualised pace in the third quarter — heightened concern about the possibility there of a recession.
Consumers and businesses were also retrenching amid the global financial storm while a survey showed underlying confidence among consumers and businesses in the European Union had declined to a 15-year low.
US financial group American Express unveiled 10,000 job cuts worldwide and equipment maker Motorola said it would slash 3,000 positions, with both firms citing weak economic conditions.
Japan\’s second-largest bank Mizuho Financial Group said it had cut its net profit forecast by more than half for the current year due to turmoil in the global financial markets.
The leaders of Europe\’s two largest economies, German Chancellor Angela Merkel and British Prime Minister Gordon Brown, meanwhile, met on Thursday to determine how to respond jointly to the global financial crisis.
"This is a global problem that requires a global solution. No country, no matter how big, can solve these problems on their own," Brown said.
Defaults on subprime mortgage loans, which were repackaged in complex investment instruments and resold worldwide, set off a chain reaction of problems for banks and other institutions.
Central banks in the United States, Japan, China, Hong Kong and Taiwan have lowered borrowing costs this week. Speculation is growing that the European Central Bank and the Bank of England could follow suit next week.
Japan\’s rate cut comes one day after the government unveiled a 26.9 trillion yen (277 billion dollar) package to cope with what Prime Minister Taro Aso called a "once-in-a-century event."
Meanwhile, the International Monetary Fund would likely decide next week on emergency loan applications from Iceland and Hungary, countries battered by the crisis, an IMF spokesman said.
On Thursday, global stock markets kept upward momentum for a third straight day as investors anticipated some easing of a worldwide credit squeeze and shook off news of the contraction in US growth.
The Dow Jones Industrial Average surged 189.89 points or 2.11 percent to finish at 9,180.85 and the Nasdaq gained 41.31 points, 2.49 percent to 1,698.52.
In Europe, the London FTSE 100 index of leading shares gained 1.16 percent to 4,291.65, while in Paris, the CAC 40 rose 0.15 percent to 3,407.82.