Uncertainties over outlook said rising; split evident over size of rate cut By Chris Oliver, MarketWatch HONG KONG (MarketWatch) -- The Bank of Japan's policy board decided Friday to cut its base lending rate to 0.3%, abandoning its goal of normalizing interest rates in favor of injecting stimulus into the No. 2 global economy in an effort to head off recession. The policy board vote was split 4-to-4, with central bank governor Masaaki Shirakawa casting in favor, which carried the motion. The overnight call rate was at 0.5%, the lowest among industrialized nations, before the rate cut, which marked the first time Japan has lowered interest rates in seven years and seven months. The Nikkei 225 Average suffered sharp losses in the wake of the announcement, ending the trading session 5% lower. See Asia Stocks for more. And in midday London trading, the dollar was quoted at 97.74 against Japan's yen, down from 98.48 yen in North American trading late Thursday. See Currencies. Shirakawa, in a post-rate meeting that took place about three hours after the decision was announced, said that three of the four dissenting votes came from board members who had sought a larger cut of a quarter of a percentage point. Analysts said the failure to clarify the division may have contributed to the sharp sell-off in the Nikkei, as the initial impression was of a board divided on the direction of monetary policy. "Communication was miserable, this has just made huge confusion in the financial markets," said Masamichi Adachi, senior economist with J.P. Morgan Chase & Co. in Tokyo. Shirakawa also reportedly said late Friday that uncertainty over the outlook for the Japanese economy had increased. The rate cut had been widely tipped by analysts, who were of the view that the Bank of Japan would likely move to stem gains in the yen and shore up an economy battered by recession worries that helped send the Nikkei to a 26-year low on Monday. "Today's move seemingly demonstrated the bank's unwillingness to aggressively ease monetary policy in the foreseeable future," wrote Hiromichi Shirakawa, senior economist with Credit Suisse in Tokyo in a research note. In cutting interest rates by one-fifth of a percentage point, defying expectations of a quarter-point cut, the Bank of Japan appeared to be trying to save up its rate-cutting ammunition before hitting zero, he added. Analysts were skeptical about the impact of the cut. "There is very little that a rate cut can actually achieve; it's certainly not going to weaken the yen dramatically, it's not going to support the equity market and it's not going to bolster the economy, so if anything it is likely going to be symbolic," said Glenn Maguire, Asia-Pacific economist with Societe Generale, in Hong Kong. Shirakawa may also be concerned that further rate cuts could see Japan slip back into a liquidity trap, where monetary policy become ineffective is driving credit growth, Maguire said. 'Increased sluggishness' In a statement accompanying the announcement, the policy board downgraded its domestic outlook, saying: "Increased sluggishness in Japan's economic activity will likely remain over the next several quarters with exports leveling off and the effect of earlier increases in energy and materials prices persisting." In its biannual Outlook for Economic Activity and Prices report, also released Friday, the Bank of Japan cut its growth estimate for the current fiscal year ending March 31 to 0.1% in real terms from its July estimate of 1.2%. In addition, the central bank said it would introduce an annual 0.1% interest rate on excess reserves held in its accounts from November through March, in an effort to pump additional liquidity into the system ahead of the year-end and the fiscal year-end.

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