Page last updated at 11:01 GMT, Friday, 31 October 2008

Japan responds to 'economic storm'

By Duncan Bartlett
Business reporter, BBC News

Bank of Japan Governor Masaaki Shirakawa
It is the first time the Bank of Japan has cut rates since 2001

Japan's move to cut its main interest rate for the first time since 2001 comes in response to what the prime minister has called the "harshest economic storm in 100 years".

The Bank of Japan has lowered its key lending rate to 0.3% from 0.5%.

At the same time, the government has announced what it describes as a $51bn (31bn) stimulus package.

Prime Minister Taro Aso says the money will be targeted at struggling small businesses and families.

However, the opposition says it is likely to be squandered on unnecessary projects with little long-term value.

Previous slump

The rate cut and spending programme are reminiscent of the policies Japan used during the 1990s to try to pull its economy out of a prolonged slump, with limited success.

Although the ultra low lending helped companies borrow to invest, it also meant that ordinary people received almost no return on their savings.

Part of the reason for the latest interest rate cut has been concern about the soaring value of the Japanese currency, the yen.

It has been rising just as the stock market has been falling.

Normally, low interest rates bring down a currency's value, but it showed little change following the latest announcement of a cut.

Major Japanese corporations such as Sony, Toshiba and Suzuki have all warned that their profits will suffer if the yen continues at its current level.

That has hurt their share price, causing a viscous circle in which the stock market falls, the yen rises and confidence suffers.

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