Fed Cut Pressures Japan and China to Follow Suit

Fed Cut Pressures Japan and China to Follow Suit Expectations increased Wednesday that central banks in Japan and China would cut interest rates again after the Federal Reserve lowered its benchmark rate by more than expected and declared that it would try to pull the American economy out of recession by pumping money into the system.

Economists said that the Fed’s decision on Tuesday — combined with a outlook for the Japanese economy and the persistent strength of the yen — increased the pressure on the Japanese central bank to follow suit on Friday with a cut in its already ultralow rates.

The Bank of Japan cut its key rate to 0.3 percent in October, shaving 0.2 percentage points off the benchmark level, its first cut in seven years. The central bank has since signaled its reluctance to cut further.

But economists said the bank might have little choice but to follow the Fed, sooner rather than later.

“The Fed funds target is now lower than the B.O.J.’s overnight rate target of 0.30 percent,” said Tomoko Fujii, head of economics and strategy at Bank of America in Tokyo. “As a result, the B.O.J. is now more likely than not to cut the policy rate to 0.10 percent this Friday, in addition to implementing liquidity provision measures.”

Satoru Ogasawara, an economist with Credit Suisse in Tokyo, agreed, although he said he thought a rate cut would come early next year, rather than this week.

“The B.O.J. probably doesn’t want to lower rates to zero again, but will be placed in a position where it has no alternative,” Mr. Ogasawara said. He expected the bank to lower the overnight rate target to 0.1 percent in the first quarter of 2009, and to zero in the fourth quarter.

China, too, is widely expected to deliver more cuts, with the next move looking increasingly likely to come before the end of the year. On Tuesday, the Chinese central bank’s governor,Zhou Xiaochuan, signaled his willingness to lower rates.