Japan cut interest rates for the first time in seven years today and warned severe conditions in the global economy could persist, as more central banks shift from stabilising credit markets to slashing borrowing costs in the face of the worst crisis since the Great Depression.
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".
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 per cent from 0.50 per cent, 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 jeopardises that outcome." Japan's Nikkei share average fell 5 per cent, making its drop this month a record 24 per cent.
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 per cent, the lowest since April 2005, from 4 per cent 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.
Reuters