Japan central bank may cut interest rates

In order to stabilize the financial market, prevent the real economy from further sliding, stop the strong appreciation of the Japanese Yen and to stop the strong decline of the stock market, the Japan central bank is studying the possibility of an interest rate cut and may announce on the 31 October 2008 that it will reduce the inter-bank overnight unsecured call rate from the current 0.5% down to 0.25%.

According to Japanese media reports, the Japan central bank will see how are the market conditions and will decide by 31 October 2008. If there is really a rate cut, it will be the first rate cut by the Japanese central bank since March 2001.

According to reports, the Japan government will announce on the 30 October 2008 further measures to counter the financial crisis. Also, the US government will announce on the 29 October 2008 on their interest rate movement. The EU central bank will announce on the 6 November 2008. Japan central bank usually act in tandem with the other big central banks.

Macquarie Research economist Richard Jerram in his analyst report mentions that if the Japan central bank were to cut its interest rate as reported by the media by 25 basis points, the effect on the Yen is limited unless the Japan government has some other measures to announce together.

In the report, if the Japan central bank during the announcement of the interet rate cut were to promise not to tighten policies before stabalizing the situation (ie, core CPI to approximately 1%), then the effect of the 25 basis point interest rate cut would be prominent. But the report also hints that the Japan central bank has past history of breaking promises.