BOJ Rate-Cut Speculation Jumps After Nikkei Report

By Mayumi Otsuma and Toru Fujioka

Oct. 29 (Bloomberg) -- Speculation the Bank of Japan will cut interest rates for the first time in seven years jumped after the Nikkei newspaper reported that the central bank may halve its target rate this week.

The chance that the central bank will lower the benchmark lending rate to 0.25 percent from 0.5 percent on Oct. 31 rose to 62 percent from 8 percent yesterday, according to calculations by JPMorgan Chase & Co. using overnight interest-rate swaps.

The Nikkei reported that central bank policy makers are leaning toward lowering borrowing costs this week, without citing any sources. The bank came under pressure to cut rates after the yen surged to a 13-year high, driving the stock market to its lowest since 1982. The policy board will make its decision taking market moves into account, the Nikkei said.

``Financial markets are factoring in a rate cut,'' said Yasunari Ueno, chief market economist at Mizuho Securities Co. in Tokyo. ``It's becoming increasingly difficult for the central bank to forego the option.''

Yoshihiro Sugimoto, chief press officer at the Bank of Japan, declined to comment on the Nikkei report.

Japan's stocks surged a second day as speculation for a rate cut spurred the steepest drop in the yen in three decades, boosting earnings prospects for makers of cars and electronics.

The Nikkei 225 Stock Average climbed 4 percent as of 12:58 p.m. in Tokyo. The yen traded at 96.68 per dollar from 98.03 late yesterday in New York, when it fell the most since 1974. The currency rose to 90.93 on Oct. 24, the highest since 1995.

`Limit Yen Strength'

A rate cut ``fits with their desire to limit yen strength,'' said Alan Ruskin, the Greenwich, Connecticut-based head of international currency strategy in North America at RBS.

Finance Minister Shoichi Nakagawa this week said that the government was ready to act on the yen after the Group of Seven industrialized nations issued an unscheduled statement expressing concern about ``excessive gains'' by the currency.

Even with the yen's losses and the stock-market rally since yesterday, the policy board would be hard-pressed to pass on a rate cut this week because investors are expecting one and the government wants the bank to work with overseas counterparts to alleviate market turmoil, economists said.

``The bank has to consider the risk of not reducing rates for markets as investors' expectations are becoming very high,'' said Mari Iwashita, chief market economist at Daiwa Securities SMBC Co. in Tokyo. ``The government is the one who wants the Bank of Japan to cut rates this week to show Japan is coordinating with other nations to ease turmoil in markets.''

`Symbolic' Effect

Economic and Fiscal Policy Minister Kaoru Yosano said yesterday that a rate cut would have a ``symbolic'' effect if done in conjunction with other central banks, showing that Japan is taking part in global efforts to counter the financial crisis.

Yosano's comment ``suggested he hopes the Bank of Japan will lower rates to join its counterparts in the U.S. and Europe,'' said Ueno at Mizuho Securities. ``The government is signaling it wants the central bank to take action too.''

Prime Minister Taro Aso and Finance Minister Nakagawa were circumspect in their comments today on what the Bank of Japan should do.

``How can we tell the BOJ to lower rates? It's a matter for the BOJ, not us,'' Aso told reporters in Tokyo. Nakagawa said deciding whether to lower interest rates is ``up to the Bank of Japan, which is completely independent.''

`Being Shrewd'

Iwashita of Daiwa Securities said the government ``doesn't want to make it obvious that they want the bank to cut rates.''

``They are being shrewd not to show they are pressuring the central bank,'' she said.

Governor Masaaki Shirakawa and his colleagues didn't take part in this month's joint rate cut by counterparts from North America and Europe, saying Japan's borrowing costs are already ``very low.'' A reduction would be the first since March 2001, when the bank lowered the benchmark close to zero percent to counter deflation and lift the economy out of a recession.

Investors bet the Federal Reserve will reduce its benchmark rate by half a point to 1 percent later today. European Central Bank President Jean-Claude Trichet on Oct. 27 said his bank may lower borrowing costs next week.

``The BOJ based its recent decision not to join in the coordinated easing action on loose financial conditions, but the situation has changed substantially since then,'' said Tetsufumi Yamakawa, a former central bank official and now chief Japan economist at Goldman Sachs Group Inc. in London. ``At the very least, the BOJ is rapidly losing the option of not doing anything.''

To contact the reporters on this story: Mayumi Otsuma in Tokyo at motsuma@bloomberg.net; Toru Fujioka in Tokyo at tfujioka1@bloomberg.net