Monday, November 3, 2008

Last Updated: October 31, 2008: 3:52 AM ET

TOKYO (AP) -- The Bank of Japan voted Friday to cut its key interest rate for the first time in more than seven years, finally joining central banks around the world in trimming borrowing costs to cushion the impact of the global financial crisis.

The Bank of Japan policy board voted in a rare 4-4 split decision to reduce the uncollateralized overnight call rate to 0.3%, the lowest among major economies. Gov. Masaaki Shirakawa, who has the final say in the event of a tie, voted in favor of a rate cut.

The central bank, operating with one vacancy on its nine-member board, last loosened monetary policy in March 2001.

"Adjustments in the world economy stemming from financial crises in the United States and Europe have further increased in severity," the Bank of Japan said in its statement. "Under these circumstances, 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."

The move comes two days after the U.S. Federal Reserve slashed its key rate by half a percentage point to 1%, a level seen only once before in the last half century. Earlier this week, South Korea's central bank lowered rates by three-quarters of a point - its biggest cut ever - to 4.25%. China, Hong Kong and Taiwan also reduced rates this week.

Many analysts are also expecting the European Central Bank to cut its key rate, now at 3.75%, when its policy panel meets on Nov. 6.

Investor hopes for a rate cut intensified this week after The Nikkei financial daily reported Wednesday that the central bank was mulling a policy shift. The speculation reigned in a recently surging yen and helped fuel a rally in Japan's stock market, where the Nikkei index jumped nearly 10% Thursday.

On Friday, however, the Nikkei slid 5%, most of it coming after the rate cut.

Despite the global financial crisis, a faltering domestic economy and extreme market volatility, the Bank of Japan had until now left monetary policy untouched, reiterating its long-held stance that the world's second-largest economy faced both upside and downside risks. The benchmark rate had stood at 0.5% since February 2007.

The Bank of Japan "judged that a reduction in policy interest rates and a further increase in the flexibility of money market operations were necessary to maintain accommodative financial conditions," it said.

In addition to reducing interest rates, the policy board voted to enact credit-easing measures including a temporary facility to pay 0.1% interest on commercial banks' excess reserves deposited at the Bank of Japan "in order to further facilitate the provisioning of sufficient liquidity toward the year-end and fiscal year-end."

It also lowered its basic loan rate, at which financial institutions directly borrow from the BOJ, to 0.5% from 0.75%.

The central bank's actions Friday follow a series of weak economic data recently, as well as evidence earlier Friday that inflation was slowing. For the July-September period, industrial output fell 1.2% from the previous three months in its third straight quarter of declines, and production is expected to drop 2.3% in October and 2.2% in November.

Core inflation, which excludes fresh food prices, jumped 2.3% during the month from a year earlier on still-high fuel and food costs, according to the Ministry of Internal Affairs and Communications. Although the result marks the 12th consecutive month of increase for the core consumer price index, it is slower than August's 2.4% rise.

Fuel costs in particular are cooling, with gasoline prices rising 20.7% in September, down from 26.4% in August.

"As for prices, consumer price inflation is likely to decline gradually reflecting the recent fall in commodity prices, although it remains relatively high to date," the central bank said.

Economists and market observers now await the central bank's Semiannual Economic Outlook to be released in the afternoon, as well as comments by Shirakawa.

2) Commentary by David Zwebner, CEO of CommStock Trading 

U.S. Economy
The U.S. Commerce Department said that personal incomes were up .2% in September while consumer spending was down .3%, as expected. The September eurodollars closed down .135 at 97.385, the lowest close in three weeks.

The U.S. Labor Department said that the employment cost index was up .7% in the third quarter, as expected. The December U.S. T-bonds fell 1.12/64ths to 113.08/64ths.

One of the Federal Reserve's inflation indicators, the core rate of personal consumption expenditures, was up 2.4% in September from a year ago, down from a 2.5% annual gain in August.

The University of Michigan's consumer sentiment index increased to 57.6, up from a reading of 57.5 earlier this month.

Grains
Late yesterday, the Korea Feed Association reportedly bought 55,000 tons of U.S. corn from Archer Daniels Midland. December corn was down 8 cents at $4.015. The weather has been excellent for harvest progress this week.

Sugar
According to Dow Jones Newswires, F.O. Licht is estimating the world sugar consumption will still be up 1.8% in 2008-2009 and will outpace production by 472,300 tons. March sugar ended up .17 at 12.02.

Cocoa
Dow Jones Newswires also reported that Fortis Bank is predicting that world production of cocoa will exceed consumption by 52,000 tons in 2008-2009. December cocoa was down $31 at $2,053.

Energies
December natural gas prices have fallen over 50% in the past four months, but today they closed up 35.2 cents at $6.783 with concerns about the winter ahead.

December crude oil traded lower for most of the day, but closed up $1.85 at $67.81, possibly helped by some bargain-hunting.

Currencies
Statistics Canada said that real GDP was down .3% in August and up .6% from a year ago, a little better than expected. The sectors that were hardest hit were manufacturing, mining, and energy. The December Canadian dollar finished up .87 at 83.25.

The Bank of Japan reduced its interest rate from .50% to .30% in an effort to help its economy. Also, consumer prices were up 2.1% in September from a year ago and the unemployment rate improved from 4.2% to 4.0%. The December yen ended down .0034 at 1.0140.

Eurostat reported that the unemployment rate in the Euro area 15 remained at 7.5% in September. Consumer prices are expected to be up 3.2% in October from a year ago, down from a 3.6% annual gain in September. The December euro fell 2.10 cents to $1.2741.

David Zwebner, CEO
CommStock Trading Ltd.
Tel: +972-(0)2 624-4963
Fax: +972-(0)2 624-4876
www.ecommstock.com

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