Japan cuts interest rates

The Bank of Japan acted after stock prices touched a 15-year low

The Bank of Japan has slashed interest rates, as key data heightened fears that the country is sliding back into recession.

The risk of Japan going back into outright recession is a very real risk

Garry Evans, HSBC Securities

The Bank's policy board decided to cut the country's headline interest rate by 0.1% to 0.15%.

And it reduced the discount rate, which sets the level at which the Bank charges High Street institutions for loans, by 0.1% to 0.25%.

The move follows a 0.15% cut in the discount rate on 9 February, the first reduction since 1995.

The switch to a reducing stance also represents a policy reversal for the Bank which, controversially, in August raised the headline rate on hopes of economic revival.

Stocks slide

The rate cuts came minutes Tokyo stocks touched a 15-year low in afternoon trade.

While shares rallied in late trade, the benchmark Nikkei 225 index closed at another 28-month low.

Traders said share prices were hit by a fall of 4.4% in the Nasdaq, the US-based index heavily weighted towards technology stocks.

The index is viewed with particular interest in Japan, which relies for much of its industrial muscle on the strength of its electronic firms.

Recession fears

Investor sentiment was further hit by the publication of data revealing that industrial production slumped 3.9% in January, compared with the month before.

The pace of falling exports showed up much more quickly than we had anticipated

Akihiko Suzuki, Sanwa Research Institute

The slide was considerably worse than investors had feared.

"We expected the output to be weaker than the government prediction, but the extent to which it dropped far outstripped our estimate," said Akihiko Suzuki, senior economist at Sanwa Research Institute and Consulting.

The data heightened concerns that Japan's economy, which at the end of last year seemed to be recovering from its worst slump in more than 40 years, might again begin to contract.

"It's the first real sign we've got that the Japanese economy is slowing down very substantially," said Garry Evans, a strategist with HSBC Securities.

"The risk of Japan going back into outright recession is a very real risk."

Fears of recession, defined as two consecutive quarters of shrinking economic production, were already acute after figures showed Japanese GDP contracted by 0.6% between July and September.

Figures for the last three months of 2000, due out next month, were expected to show modest growth, at best.

Export slump

The output slump in January was worst in the transport sector, which includes carmakers, where production plunged 9.9%.

Output from electronics and machinery firms slid 3.8%.

Analysts blamed the falls on lower exports, particularly to the US, which is suffering its own economic turmoil.

"The pace of falling exports showed up much more quickly than we had anticipated," Sanwa's Akihiko Suzuki said.

"The US economic slowdown is dealing a blow to Japan's exports to Asia indirectly, while shipments to the US took a direct beating."