Bank of Japan May Join Counterparts by Cutting Rate to 0.25%

By Mayumi Otsuma

Oct. 31 (Bloomberg) -- The Bank of Japan will probably cut interest rates today, joining overseas counterparts to stave off global financial turmoil by offering cheaper credit.

Governor Masaaki Shirakawa and his colleagues will trim the benchmark overnight lending rate to 0.25 percent from 0.5 percent, the first reduction in seven years, 15 of 17 economists surveyed by Bloomberg News predict. The bank may also announce measures to provide more liquidity, including a plan to pay interest on reserves.

A rate cut by the Bank of Japan would come less than a month after it opted out of joint reductions made by central banks in Europe and North America, saying the country's borrowing costs are already ``very low.'' Shirakawa and his board came under pressure to take action after Japan's currency surged to a 13-year high last week, driving the Nikkei 225 Stock Average to the lowest level since 1982.

``The Bank of Japan doesn't have the option of forgoing a rate cut because it's highly likely such a decision would disappoint markets, causing stocks to resume plunging and the yen to advance,'' said Kazuhiko Sano, chief strategist at Nikko Citigroup Ltd. in Tokyo. ``BOJ board members will probably conclude a cut in tandem with the Fed and ECB would be more effective than waiting until market moves force it to take action.''

Asian stocks rallied and the yen slumped yesterday after central banks in the U.S., China, Taiwan and Hong Kong cut borrowing costs to spur growth. European Central Bank Governor Jean-Claude Trichet said this week his board may reduce interest rates next week.

`Doing Something'

``The Bank of Japan will have to be seen to be doing something in an environment where the U.S. is particularly sliding into a deep recession and other central banks are continuing to cut rates aggressively,'' said Julian Jessop, chief international economist at Capital Economics Ltd. in London.

Speculation the Bank of Japan would cut rates were fueled by a Nikkei newspaper report on Oct. 29 that said policy makers were leaning toward a reduction. The chance that the bank will halve its key rate rose to 60 percent yesterday from 8 percent earlier this week, according to calculations by JPMorgan Chase & Co. using overnight interest-rate swaps.

The yen's strength is eroding profits of exporters including Honda Motor Co. and Sony Corp. Falling share prices are depleting capital of Japanese banks, which traditionally hold other companies' stocks in cross shareholdings.

A rate reduction would be the first since March 2001, when the bank lowered the benchmark close to zero percent to counter deflation and lift Japan out of a recession.

Growth Forecasts

The bank will announce its decision in a statement probably by early afternoon in Tokyo. Policy makers will also release their forecasts for economic growth and consumer prices in a semi-annual economic outlook report at 3 p.m. Shirakawa will speak at a press briefing at 3:30 p.m.

A rate reduction may provide some relief to Prime Minister Taro Aso, who yesterday unveiled a $51 billion dollar economic stimulus package in a bid to minimize the effect of tumbling stock prices and the surging yen on the economy.

``The government, fearing the yen's strength and stock declines, has been hinting that it wants the Bank of Japan to cut,'' said Hiromichi Shirakawa, a former central bank official and now chief economist at Credit Suisse Group in Tokyo.

Economic and Fiscal Policy Minister Kaoru Yosano said this week that a reduction would be ``symbolic'' if done in conjunction with other central banks and would show Japan is taking part in global efforts to counter the financial crisis.

The central bank may also say today that it will pay interest on reserves commercial lenders hold at the bank and widen the range of collateral it accepts for loans. Policy makers are also considering resuming a stock-purchase program it ended in 2004.

Paying interest on reserves would discourage lenders from hoarding cash and help the bank provide more funds without worrying about the overnight lending rate falling below its target rate. The Federal Reserve adopted the measure on Oct. 6.

To contact the reporter on this story: Mayumi Otsuma in Tokyo at motsuma@bloomberg.net