A dramatic rate cut by the US Federal Reserve has ratcheted up the pressure on a reluctant Bank of Japan to follow suit this week, with analysts saying to hold back would rock Japanese markets and worsen the crisis.
Some analysts suggested the Japanese central bank could also cut rates to almost zero on Friday, whereas before the Fed move the BOJ was seen as ready to take more steps to ease a credit crunch but undecided about cutting rates.
The US Federal Reserve broke into uncharted territory by chopping benchmark rates to as low as zero and pledging to use "all available tools" to turn back a deepening recession.
As government officials pushed the BOJ to take more action and voiced concern about a rising yen, investors saw a 60 per cent chance of it cutting rates to 0.1 per cent from its current 0.3 per cent.
"With the Fed having come this far, markets would be hugely disappointed if the BOJ keeps rates on hold at 0.3 per cent this week. The rate differential could trigger sharp yen rises and push down stocks, reviving the market crisis in October," said Hirokata Kusaba, senior economist at Mizuho Research Institute.
"The BOJ needs to do something and I'm sure they are aware of that. It's likely to cut rates, even to zero, this week. It needs to avoid keeping Japanese rates higher than those of the US."
In further pressure, chief government spokesman Takeo Kawamura, a cabinet minister, said the BOJ must support the economy.
"The abnormal rise in the yen could affect export industries and I hope that the BOJ will make a comprehensive consideration, including those factors, to decide its monetary policy," Kawamura told a news conference.
Finance Minister Shoichi Nakagawa said the government would take all necessary steps to support the economy including steps to deal with rapid foreign exchange moves.
The Fed's surprisingly big rate cut sent Japanese government bonds surging and the yen back towards 13-year highs against the dollar, to the likely dismay of a BOJ which is also worried about the strong yen's impact on Japanese exports.
The yen was seen rising further against the dollar with US interest rates now lower than Japan's, adding pressure on the BOJ to slash rates, analysts said.
BOJ Governor Masaaki Shirakawa added fuel to the fire yesterday when he warned Japan's economy was in severe condition and monetary conditions were rapidly becoming less accommodative - his bleakest prognosis yet.
Central banks across the globe are slashing rates and eyeing unorthodox policy measures as the global financial crisis sends many rich countries into recession and slows growth in China and India.
Reuters