• BOJ to debate rate cut, credit crunch steps
• Government sees no Japan growth in 2009/10
• Yen's rise sparks currency intervention talk

TOKYO - EXPECTATIONS that the Bank of Japan would cut interest rates on Friday were tempered by reports that it would opt instead for other steps to ease corporate credit strains as the yen's sharp rise and crumbling demand batter the economy.

A dramatic rate cut by the Federal Reserve on Tuesday, which took US rates below Japan's, and the yen's subsequent rise to a 13-year high against the dollar have ratcheted up government pressure for BOJ action to help an economy already in recession.

Japan's government forecast on Friday that the economy would not grow in the fiscal year from April 1, although a slew of stimulus packages would keep it from contracting.

That contrasted with bleaker private sector predictions that the deepening global malaise will hit the export-driven economy hard. The government acknowledged, though, that Japan's recovery might be delayed if global conditions worsened.

'Looking at employment and companies' financial conditions, in a broad sense the economy is in a very severe state,' Finance Minister Shoichi Nakagawa told a news conference.

Most analysts polled by Reuters on Wednesday expected the BOJ to cut rates from 0.3 per cent, although some expected the central bank to opt instead for more steps to ease a credit crunch hurting corporate funding..

Several Japanese media, including Jiji news agency, reported that there was a growing chance the BOJ would forgo a rate cut at its two-day rate review meeting ending on Friday because of strong opposition within the bank to slashing rates further without examining the effect of October's rate cut.

'THe BOJ's policy rate target is 0.3 per cent now, but there still remains room for sending a message (to the market) by moving it,' Economics Minister Kaoru Yosano told reporters. But he added the economic impact of a rate cut would be minimal.

Close call, other options

The decision by the BOJ board is likely to be a close call.

'The BOJ can't get away with doing nothing, but past experience shows it is always behind the curve in acting against market moves,' said Mr Yasuhide Yajima, senior economist at NLI Research Institute.

'The chance of the bank cutting rates this week is 50-50.'

The BOJ will likely announce its decision some time between noon and 2 pm (11am to 1pm Singapore time). Governor Masaaki Shirakawa will hold an embargoed news conference later in the day, with his comments expected to be made public after 4.15 pm.

Japan, like the United States, is already in recession, with companies such as carmakers Toyota and Honda slashing output and profit forecasts as customers close their wallets worldwide.

Adding to the pain, the Fed's rate cut triggered a sharp yen rally with US interest rates, at 0-0.25 per cent, falling below Japan's 0.3 per cent for the first time since February 1993.

The government warned currency markets on Thursday of possible intervention to stem the yen's rise, which erodes the value of profits Japanese firms earn overseas, adding to pressure on the BOJ to support the export-dependent economy.

The BOJ's nine-member board, which currently has one vacancy, is likely to discuss cutting rates but also pursue other options such as increasing its monthly outright purchases of Japanese government bonds from the current 1.2 trillion yen (S$19.8 billion) , the Nikkei newspaper reported.

Alternatively, the BOJ could follow the Fed in buying commercial paper outright or purchasing asset-backed securities, reviving a scheme put in place five years ago during a banking crisis, analysts said. The BOJ may also consider expanding the type of assets it accepts in fund operations.

Commercial paper is a form of short-term unsecured borrowing often used by companies to fund day-to-day operations.

The global credit crisis has seized up the commercial paper market, forcing many Japanese companies to boost borrowing from banks at a record pace as they set aside cash at the year-end, when demand for funds tightens.

The Bank of Japan already accepts commercial paper as collateral in its fund operations but has been hesitant to directly purchase them.

The central bank cut its key policy rate to 0.3 per cent from 0.5 per cent in October and unveiled a series of measures to ease credit strains as the fallout from the global financial turmoil spread. -- REUTERS