TOKYO - THE Bank of Japan will begin a two-day policy meeting on Thursday amid growing speculation that it may follow the United States in cutting interest rates after the yen soared against the dollar.
The US Federal Reserve slashed rates to virtually zero on Tuesday, bringing the cost of borrowing in the world's largest economy below the 0.3 per cent in Japan, which for years had the world's lowest level.
In Thursday morning trade in Tokyo, the dollar was quoted at 87.30 yen, just off a 13-year low of 87.11 yen in New York on Wednesday.
The dollar was also languishing against the euro, which on Wednesday posted its strongest gain against the greenback since the single European currency was launched in 1999.
Lower interest rates often weaken a currency by making it less lucrative.
But the soaring yen hurts Japanese exporters, already suffering from the global downturn, by making their exports more costly.
'I personally think that the BoJ will cut its rate to 0.1 per cent after the yen rose to lower 87 yen levels,' said Mr Norio Miyagawa, economist at Shinko Research Institute.
'If there isn't a rate cut, the yen may rise further, which could invite government criticism against the central bank,' he said.
Japanese government officials have made little secret they would welcome a rate cut by the central bank, which is independent but has often faced political pressure on how to steer the world's second largest economy.
Mr Miyagawa said there was still a possibility the central bank would not take action on rates. Until recently, the BoJ had aimed to gradually raise rates to stop investors from bingeing on Japan's cheap credit.
'The BoJ is sure to take some action, but it could be instead in the form of outright purchases of commercial paper aimed at helping corporate fundraising,' Mr Miyagawa said.
Japan's economy shrank 0.5 per cent in the three months to September, entering its first recession in seven years.
Companies have slashed thousands of jobs as export markets dry up. Honda Motor Co on Wednesday sharply cut its earnings forecast for the year.
Mr Hideo Kumano, economist at Daiichi Life Research Institute, said that the chances of a rate cut had grown due to the sharp rise in the yen.
'But the Bank might hold the decision off until January, after making every effort short of cutting the key rate this time such as purchasing commercial paper,' he added.
In October, the Bank of Japan joined a wave of global rate cuts by lowering its benchmark level from 0.5 per cent to 0.3 per cent. It was its first cut in seven years.
The Japanese central bank has also pumped huge amounts of cash into the financial system since the global credit crunch erupted.
But Finance Minister Shoichi Nakagawa earlier this week urged the central bank to do more, saying that 'nobody denies the Japanese economy is sagging'.
'It is a big responsibility for the BoJ to avoid' a further deterioration in the economy, Mr Nakagawa said on Tuesday.
Mr Nakagawa has also left open the possibility that Japan would intervene in markets to bring down the yen, a step the country has not taken for nearly five years. -- AFP