Japan set to tackle lending costs

The Bank of Japan (BoJ) will hold an emergency meeting on Tuesday to tackle rising corporate borrowing costs amid Japan's deepening economic crisis.

The Bank is coming under increasing pressure to fund money markets more aggressively as market rates increase due to the effect of the credit crunch.

Borrowing costs are rising at their fastest rate since Japan's financial crisis ten years ago.

Analysts now believe the BoJ will trim interest rates by the end of March.

"Although the level of interest rates [charged to companies] is somewhat lower than in 1998 and 1999 when corporate financing experienced a period of increased pressure, the so-called credit crunch [and] the pace at which these rates are rising is comparable to that in 1998 and 1999," said BoJ governor Masaaki Shirakawa.

Bleak outlook

The economic climate in Japan is worsening.

Japanese industrial output and consumer spending has fallen heavily, spurring fears that the country is heading for a deep and prolonged recession.

Mr Shirakawa said the data pointed to the possibility of deflation, with Japan's consumer price index turning negative, albeit briefly, in the fiscal year beginning 1 April 2009.

Last week's figures showed industrial production fell by 3.1% in October compared with the previous month, much faster than expected.

Year-on-year consumer spending fell by 3.8% in October, also much faster than analysts had expected for the world's second-biggest economy.

Calming markets

Despite the bleak prognosis, Mr Shirakawa moved to calm speculation Japan could see an imminent interest rate cut, saying a further cut could negatively affect the operation of money markets.

But several analysts are anticipating a key rate cut by March 2009, the end of the current financial year.

Hiromichi Shirakawa, chief Japanese economist at Credit Suisse, said there could yet be a cut by the end of the year if the Bank of Japan drastically downgraded its view on the economy.

Japan's base rate stands at 0.3% after it was cut from 0.5% in October, the first rate reduction in seven years.

Japan's economy had experienced its longest period of economic growth since World War II until the sub-prime crisis started a year ago.

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