The Bank of Japan cut its super-low interest rates today for the first time in seven years, warning that Asia's largest economy will barely grow this year because of the financial crisis.
The Bank of Japan joined a rate-cutting campaign by central banks around the world, reducing its key lending rate by 20 basis points to 0.3% to try to calm volatile markets and ward off a deep recession.
But investors appeared unimpressed. Tokyo's Nikkei index tumbled 5% in the wake of the cut, which was slightly smaller than markets had expected.
The final decision was taken by governor Masaaki Shirakawa as the policy board was evenly split on whether to support the move.
The bank said that the fallout from financial crises in the US and Europe had become more severe.
'Increased sluggishness in Japan's economic activity will likely remain over the next several quarters with exports leveling off and the effects of earlier increases in energy and materials prices persisting,' it said.
It was the first interest rate cut by the Japanese central bank since March 2001, when it introduced an unprecedented policy of almost free credit to try to pull the economy out of the deflationary doldrums.
The Japanese economy shrank in the second quarter of this year and a slew of gloomy data since then has reinforced fears of a prolonged downturn.
The BoJ also slashed its economic outlook, predicting tepid growth of 0.1% in the current financial year to March and 0.6% next year. Central banks in the US, China, Hong Kong and Taiwan have lowered borrowing costs this week as part of efforts to avert a financial system meltdown.
Speculation is growing that the European Central Bank and the Bank of England could announce fresh interest rate cuts next week. But analysts said the rate cut in Japan would be largely symbolic as borrowing costs were very low even before the cut.
Until a few months ago the Bank of Japan had been eyeing an interest rate hike, but worries about inflation have since been replaced by fears of a deep global recession due to the credit crunch.
Japanese inflation slowed to 2.3% in September from a decade high of 2.4% in August, official figures also show today. Unemployment dropped to 4% in September from 4.2% in August, but the decline seemed mainly due to a shrinking workforce.
Housing spending fell 2.3% from a year earlier, down for the seventh month in a row.
