Japan joins wave of rate cuts as recession fears grow

As falling retail sales in Germany highlighted the prevailing sense of gloom in Europe’s biggest economy, the Bank of Japan (BoJ) warned Asia’s economic powerhouse would barely grow this year because of the financial crisis.

Stock markets meanwhile ended one of their most traumatic months in history by recording further falls.

“October is historically is a good month for the markets. After a month like this, who needs a bad month?,” said Jeffrey Dawkins, chief investment officer at US-based asset managers The FQ Group.

In a statement announcing it had reduced its key lending rate by 20 basis points to 0.30 percent, the BoJ forecast that “increased sluggishness in Japan’s economic activity will likely remain over the next several quarters.”

The Japanese economy shrank in the second quarter of this year and a slew of gloomy data since then has reinforced fears of a prolonged downturn.

The bank slashed its economic outlook, predicting tepid growth of 0.1 percent in the current financial year to March and 0.6 percent next year.

The rate cut was slightly smaller than markets had expected and failed to halt a slide in Japanese shares, with Tokyo’s Nikkei stock index closing down 5.01 percent as investors took profits after three days of gains.

Hong Kong shares closed down 2.5 percent as investors locked in recent sharp gains sparked by hopes that the credit crunch was easing.

In Europe, London fell 1.89 percent and Paris dipped 1.86 percent, while Frankfurt eked out a marginal gain of 0.06 percent near the half-way stage.

Central banks from the United States to Asia have lowered borrowing costs this week as part of efforts to avert a financial system meltdown.

Speculation is growing that the European Central Bank and the Bank of England could follow suit next week with fresh rate cuts.

An estimate from the Eurostat data agency showed inflation in the 15 nations using the euro pulled back in October to a nine-month low point of 3.2 percent.

Economists said that inflation was likely to keep falling in the months ahead, increasing the scope for the ECB to cut interest rates.

The Bank of Spain meanwhile said the Spanish economy, which has been hard hit by a property slump and the global financial crisis, shrank 0.2 percent in the third quarter, the first contraction in gross domestic product since 1993.

Evidence of the downturn was widespread with US financial group American Express unveiling 10,000 job cuts worldwide and equipment maker Motorola saying it would slash 3,000 positions, with both firms citing weak economic conditions.

Japan’s second-largest bank Mizuho Financial Group said it had cut its net profit forecast by more than half for the current year due to turmoil in the global financial markets.

Nissan Motor Co., the country’s third largest automaker, reported a 40.5 percent slump in half-year net profits and predicted annual earnings would plunge by two-thirds due to weak global markets and a strong yen.

Japan’s two top banks slashed their profit forecasts as weak markets and rising corporate bankruptcies further doused hopes they would be relatively immune to the credit crunch.

Mitsubishi UFJ Financial, which is buying a chunk of Wall Street giant Morgan Stanley, reduced its annual net profit forecast by two-thirds, while Mizuho Financial halved its projection.

Figures released by the national statistics office showed that German shoppers spent 2.3 percent less in September from the level the previous month.

There were also problems on the labour front with the biggest German industrial trade union IG Metall threatening strikes from next week in the key metalworking and electronics sector.

Union chief Berthold Huber slammed the employers’ offer of a 2.9-percent wage hike and said warning strikes on behalf of the industry’s 3.6 million workers would begin overnight.