Japan's central bank yesterday cut interest rates to a record low in an effort to prevent the country from sliding into a deflationary slump as fears grew internationally that the crisis in the world's second largest economy could seriously damage global growth prospects.
The unexpected move by the Bank of Japan - its first change in three years - sent the Japanese currency into a nosedive on the foreign exchange markets, erasing most of the recent gains. Within hours of the announcement the yen weakened to 137 to the dollar, having earlier hit a four-month-high of 130.
The authorities are becoming increasingly concerned at the failure of the economy to respond to a series of fiscal packages.
Growth figures for the second quarter of this year, due out tomorrow, are expected to show a sharp annualised contraction in activity of up to 8 per cent.
A handful of analysts were speculating that Japan's easing of monetary policy might herald the start of a co-ordinated and concerted cut in global interest rates.
To stimulate activity, the policy board of the Bank of Japan voted to reduce the target rate for overnight loans between banks to a record-low of 0.25 per cent, down from just under half a per cent. The discount rate remains unchanged at 0.5 per cent.
