BOJ Focusing on `Downside Risks,' Shirakawa Says

By Mayumi Otsuma

Nov. 5 (Bloomberg) -- The Bank of Japan needs to focus on the possibility that the economy will deteriorate further because of lingering global financial turmoil, Governor Masaaki Shirakawa said.

``For the time being, it's important to pay attention to the economy's downside risks, including developments in the U.S. and European financial systems and the effect of global market movements,'' Shirakawa said at a business meeting today in Tokyo.

The central bank last week cut the key overnight lending rate to 0.3 percent from 0.5 percent, its first reduction in more than seven years. Shirakawa and his board may need to bring borrowing costs even closer to zero in coming months as the credit crisis drags the world economy to the brink of a recession.

``It's highly likely that the bank will pursue additional reductions depending on the economy and financial markets,'' said Kiichi Murashima, chief economist at Nikko Citigroup Ltd. in Tokyo. ``There was a clear consensus among board members about a rate cut'' at last week's meeting, he said.

Seven of the bank's eight policy makers voted for lowering the key rate on Oct. 31, with the only difference being the margin of reduction: three preferred a cut to 0.25 percent.

Margin of Cut

Shirakawa said in parliament after the speech that the decision to cut to 0.3 percent rather than 0.25 percent ``was not intended to leave maneuvering room'' for further reductions. The 20-basis point decrease was designed to make monetary conditions accommodative without disrupting money markets, he said.

Central banks around the world are lowering interest rates to limit the damage from the crisis and prop up economic growth. The U.S., China, India, Australia, Taiwan, Norway and Saudi Arabia cut borrowing costs in the past week.

``Strains in global financial markets are likely to continue for some time, although we have observed some improvements'' since central banks added ``ample liquidity'' and governments announced such measures as injecting public money into banks, Shirakawa said.

The Nikkei 225 Stock Average has gained 11 percent in the past two days, after slumping 24 percent in October, the biggest monthly drop ever. The yen has weakened 5.1 percent against the dollar since climbing to a 13-year high on Oct. 24.

Bank of Japan board members last week predicted the world's second-largest economy will barely grow this fiscal year and the next and inflation will probably evaporate.

Shirakawa said today that inflationary pressure has eased, mainly because of a drop in global commodity prices. Japan's economic outlook is ``extremely uncertain'' and growth will remain ``sluggish for the time being,'' he said.

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