Tokyo rate cut catches nations off guard

LONDON - The Bank of Japan may have acted first in a new round of central bank action to prop up the global economy as recoveries in industrial nations falter.

The unexpected decision by the Japanese central bank on Tuesday to drop its interest rate to "virtually zero" and expand its balance sheet follows the US Federal Reserve's move toward more unconventional easing.

Bank of England officials will consider further stimulus today, while the central banks of Australia, Canada and New Zealand are among those now holding fire on further interest-rate increases.

The renewed push for easier monetary policy comes as the International Monetary Fund warns growth in advanced economies is falling short of its forecasts ahead of its annual meetings in Washington this week. The dilemma for policy makers is that their actions may do little to revive growth and end up roiling currency markets.

"The Bank of Japan is at the head of the pack," said Stewart Robertson, an economist at Aviva Investors in London, which manages about US$370 billion ($495 billion) in assets. "It looks like a lot of others will follow. Whether it's right or not is another matter."

Group of Seven ministers will gather this week in Washington on the sidelines of the IMF meeting. Currency issues will be discussed, Canadian Finance Minister Jim Flaherty, who will chair the meeting, said this week. Japanese Finance Minister Yoshihiko Noda said he's ready to explain his country's actions at that meeting.

The Bank of Japan cut its overnight call rate target from 0.1 per cent and established a 5 trillion ($80 billion) fund to buy government bonds and other assets.

It moved as the yen's surge to a 15-year high last month hurts exports and dampens economic growth. Bank of Japan Governor Masaaki Shirakawa may not be alone for long in taking action and Daiwa Institute of Research argues he's now engaged in a "vicious spiral" of monetary easing with the Fed as both compete to bolster their economies.

"The BOJ's next moves will depend on the Fed," said Maiko Noguchi, an economist at Daiwa in Tokyo. "The bank will have no choice but steadily take easing measures."

Fed Chairman Ben Bernanke and his colleagues have signalled they may announce the purchase of more Treasuries as soon as their next policy meeting on November 2-3 in an effort to boost growth and reduce an unemployment rate stuck near 10 per cent for the past year.

"The irony is that the Fed is creating all this liquidity with the hope that it will revive the US economy. It is doing nothing for the US economy and causing chaos for the rest of the world," Joseph Stiglitz, a Nobel Prize-winning professor at New York's Columbia University, said.

Bernanke said on October 4 that the Fed had aided the economy by buying US$1.75 trillion of mortgage debt and Treasuries from August 2008 through March 2010. Pacific Investment Management says a new round of quantitative easing is "likely".

"The bottom line for the US is a growth trajectory so slow you'd nearly call it stalled," Paul McCulley, a portfolio investor at Pacific Investment Management, said.

Steven Englander, New York-based head of Group of 10 currency strategy at Citigroup, says he anticipates the dollar will continue to fall, with the euro likely to pass through US$1.40 from US$1.38 yesterday. The dollar has already dropped 7 per cent against the euro since the start of September.

The revival of quantitative easing is a reversal from earlier this year, when central banks were halting stimulus or debating how to tighten policy. What's changed is the loss of momentum in industrial economies. John Lipsky, the IMF's No 2 official, said last month that global growth in the second half of the year will fall short of the fund's 3.75 per cent forecast.

After embarking on the most aggressive policy tightening in the Group of 20, the Reserve Bank of Australia unexpectedly left its benchmark rate unchanged on Tuesday at 4.5 per cent for a fifth straight month.

- BLOOMBERG