Central bank leaves benchmark rate unchanged amid concern that credit crunch could slow U.S. economy, derail recovery in Japan.
( AP ) -- The Bank of Japan kept its benchmark interest rate steady Wednesday as investors in Tokyo sent Japanese stocks soaring in reaction to a bigger-than-expected cut in U.S. rates overnight.
Later in the day the bank also kept its assessment of the economy unchanged, saying moderate growth was holding up.
The Japanese central bank's policy committee voted 8-1 to keep the overnight call rate at 0.5 percent, a bank official said at the end of the two-day meeting.
Hirokata Kusaba, senior economist with Mizuho Research Institute in Tokyo, noted that the Bank of Japan wasn't likely to raise interest rates right after the Federal Reserve's rate cut. But he said that once global markets stabilize, the Bank of Japan is likely to resume raising rates, perhaps later this year.
"The major concern for the Japanese economy is that a slowdown in the U.S. economy may bring down external demand," he said. "But slipping exports to the U.S. are being offset by growing exports to emerging markets and to Europe."
Aiming to keeping the recent credit crunch from hurting the overall U.S. economy, the Fed on Tuesday reduced its fed funds rate by a half percentage point to 4.75 percent. Many analysts had expected a quarter-point cut.
Government officials and investors in Japan welcomed the Fed's move amid worries that problems in the U.S. mortgage market would trigger a slowdown in the U.S. economy, Japan's biggest export market.
"They have reacted very quickly to the realities," said Kaoru Yosano, Japan's chief government spokesman, of the Fed.
Before problems in the U.S. mortgage market sparked the recent global market turmoil, investors had anticipated the Japanese central bank would raise rates at its September meeting. But those expectations had dramatically dwindled amid the market volatility and concerns about the U.S. economy.
The world's central banks like to show they are working together to maintain global stability, and the Bank of Japan would find it hard to raise rates at a time the U.S. is cutting them.
Also, there are persistent signs of deflation in Japan, where the core consumer price index fell 0.1 percent in July, the sixth straight monthly drop. And last week the government said the economy contracted in the April-June quarter at an annual rate of 1.2 percent, reversing its initial estimate for a 0.5 percent growth.
Asian markets rallied on news of the Fed's aggressive rate cut.
Tokyo's benchmark Nikkei 225 stock index soared 579.74 points, or 3.67 percent, to 16,381.54 points. That was it's biggest point increase since March 4, 2002. Share prices also surged in Hong Kong, South Korea, Australia, Singapore and Taiwan.
Meanwhile, the Bank of Japan, in a monthly report released Wednesday, left its assessment for the world's second-largest economy the same as in the previous month. The bank repeated its optimistic outlook for the future, while expressing some caution about the U.S. economy.
" Japan's economy is expected to expand moderately," it said.
The BOJ last raised interest rates in February.