TOKYO/HONG KONG (Reuters) – Japan cut interest rates for the first time in seven years on Friday and warned severe conditions in the global economy could persist, as more central banks shift from stabilizing credit markets to slashing borrowing costs in the face of the worst crisis since the Great Depression.
Bank of Japan (BoJ) Governor Masaaki Shirakawa speaks during a news conference in Tokyo October 31, 2008.
However, the rate reduction was a close call at the Bank of Japan and was not as big as many had expected, sending a mixed message to financial markets.
Policy makers have been struggling to find the right response to a rapid slowdown in the global economy that has hurt corporate profits and which sparked a record freefall in global stock markets in October.
Companies world wide have reported job cuts, warned of falling profits and battered balance sheets in what Japanese Prime Minister Taro Aso described as a "harsh storm seen only once in 100 years."
British Bank Barclays Plc is close to raising about 6 billion pounds ($9.8 billion) from a number of potential investors, a person familiar with the matter said. Details could be announced later on Friday.
Underlining the corporate gloom, Mizuho Financial Group became the second major Japanese bank this week to cut its full-year net profit forecast by more than half because of bad loans and losses in its equity portfolio.
The Bank of Japan cut its benchmark overnight call rate to 0.30 percent from 0.50 percent, a slightly smaller reduction that the quarter percentage point many had expected.
A 4-4 vote on the policy board meant the central bank governor had to cast the deciding vote.
"At a time of extreme financial uncertainty and volatility, to have a policy board so evenly split is hardly reassuring," said Glenn Maguire, Asia Pacific chief economist with Societe Generale in Hong Kong.
"Whatever the desired outcome -- the fact that the board was so evenly split jeopardizes that outcome."
Japan's Nikkei share average fell 5 percent, making its drop this month a record 24 percent.
The rate reduction is the latest in a series of rate cuts globally as central banks move rapidly to try to cushion growth now that interbank lending rates have been consistently falling.
The average benchmark interest rate in the Group of Seven countries has dropped to 2.36 percent, the lowest since April 2005, from 4 percent in August 2007 when credit markets began imploding because of mounting subprime mortgage defaults.
Economists widely expected Australia, Britain and the euro zone to cut rates next week.
The economies of Britain, Europe, Japan and the United States are contracting. The latest growth data showed the U.S. economy shrank in the third quarter, three months that ended with the dismantling of Wall Street in September.
SIGNS OF LIFE
Despite the potential for higher unemployment and softer consumer spending around the world, there were some signs rate cuts from Beijing to Washington and massive doses of liquidity were unlocking short-term financing for banks and improving investor sentiment.
A top Australian policy maker on Friday said the Federal Reserve's massive expansion of U.S. dollar swaps with other central banks seemed to be working to ease pressures in global markets.
The efforts also showed some signs of relieving panicked investors. The MSCI all-country world equities index is set for its biggest weekly rise since the gauge started 20 years ago.
China reduced its benchmark rate for the third time in two months earlier this week and the U.S. Federal Reserve eased its rate on Wednesday to the lowest level since June 2004.
Along with central banks, governments around the world were waging an all-out battle to contain the fallout from the financial crisis, including by cutting taxes, taking equity stakes in banks and backing bank deposits.
The South Korean government is considering $7.3 billion in additional spending to support domestic demand, according to a local business paper, as the worst fears appeared to have dissipated about a meltdown in Asia's fourth-largest economy.
The global largesse has been mostly centered on the bank industry and consumers, leaving others like the automobile industry to face upheaval among car makers largely without government help. Six U.S. governors urged the White House for aid on Thursday.
A deal to merge General Motors Corp and Chrysler LLC hit an impasse after the Bush administration ruled out funding for it, putting any merger on hold until after the U.S. presidential election, three people with direct knowledge of the talks said.
Such a merger could result in as many as 40,000 job cuts, a study by Kimberly Rodriguez of consultant Grant Thornton shows.
On Thursday, Japan unveiled a $50 billion economic stimulus package and German cabinet minister Michael Glos said the European country planned to introduce a range of steps worth up to $39 billion.
The Fed alone has made available through swap lines a sea of U.S. dollars to central banks globally so they can meet financing demands.
"Overall, it appears this has had some success with conditions in the U.S. dollar swap markets improving over the last few weeks, and the cost of U.S. dollar funding declining to more normal rates," said Reserve Bank of Australia Assistant Governor Guy Debelle at a conference.
The U.S. economy shrank at a 0.3 percent annual rate in the third quarter, the sharpest contraction in the United States in seven years. U.S. consumers slashed spending at the fastest rate in 28 years in the third quarter.
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