Tokyo stock prices jumped 6.3 percent yesterday, lifted by an unexpected cut in interest rates and investor hopes that the government would take stronger measures to aid Japan's sagging economy. But some analysts said they doubted the market's buoyancy would last.
The Bank of Japan surprised financial markets by announcing yesterday that it would lower a key short-term interest rate. The announcement gave further momentum to the stock market, which had risen during the three prior sessions.
The initial impetus came from government officials who had begun to give new assessments of Japan's troubled economy, acknowledging that it remained weak.
The market had been so depressed in the last few weeks that the mere acknowledgment of economic weakness by the officials gave stocks a surprising lift.
"They might finally take the proper policy measures," said John Bahrenburg, a market strategist at Merrill Lynch Japan Inc. "Now it seems they have a greater appreciation of the risk of a deflation spiral and the economy entering into a recession again."
The Nikkei index of 225 shares, the benchmark stock indicator, jumped 956.19 points, or 6.3 percent, to close at 16,213.08 Friday. That was its highest closing level in nearly two months.
In its announcement, the central bank said it would add funds to the money market, pushing down the interest rate that banks charge one another for loans overnight. It said it would allow the rate to fall below the discount rate, which is charged on loans that banks obtain from the central bank.
The overnight rate had already been slipping in the last few weeks.It declined to a record low of 0.75 percent at one point Friday, below the discount rate, which at 1 percent is at its lowest level ever. The overnight rate settled at 1.06 percent, down from 1.24 percent on Thursday. Analysts said the central ** bank had set a target for the rate of around 0.75 percent.
The Bank of Japan said it was not yet considering a cut in the discount rate.
The central bank's announcement, made late in the morning in Tokyo, followed by less than eight hours the news of a similar step by the American central bank. The Federal Reserve announced in Washington on Thursday afternoon that it would allow the Federal funds rate, which like the Japanese overnight rate reflects the cost to banks of raising funds in the money market, to decline to 5.75 percent from 6 percent.
One reason for the Japanese rate cut was to offset the potential impact on the currency market of the Fed's cut. In general, interest rate cuts lower a currency's value because they reduce the returns available from investments denominated in that currency. By lowering its own interest rates, Japan hoped to offset any downward pressure exerted on the dollar by the Fed's rate cut.
The rate cuts in the two countries were not carried out as part of a coordinated effort. But Japan did join with the United States Friday in intervening in the currency market, buying dollars and selling yen. The strong yen has hurt Japan's economy.
More important than its impact on the currency market, the Bank of Japan's rate cut indicated that the central bank was decisively easing monetary policy to help spur investment and stimulate the economy.
Japan's economy has been sagging since the beginning of the 1990s. Economic output rose only one-tenth of 1 percent in the first quarter of 1995 from the prior three months, and some economists believe the economy contracted during the second quarter.