By Toru Fujioka Dec. 17 (Bloomberg) -- Expectations that the Bank of Japan will cut interest rates more than doubled after the government urged the central bank to do more to support the economy and the U.S. Federal Reserve reduced its benchmark to as low as zero. Investors see a 52 percent chance that the policy board will reduce the overnight call rate from 0.3 percent at this week’s meeting, according to calculations made by JPMorgan Chase & Co. based on interest-rate swaps trading, up from 20 percent yesterday morning. The meeting ends on Dec. 19. Governor Masaaki Shirakawa has indicated he is reluctant to lower the rate again after cutting it for the first time in seven years in October. Still, he’s coming under pressure after Finance Minister Shoichi Nakagawa called on the central bank to consider further measures to avoid a deeper recession and the Fed’s rate reduction pushed the yen close to a 13-year high. “The combination of the very weak domestic economy, the very strong yen, and what is likely to be intense political pressure on the BOJ will, we think, force an easing move sooner rather than later,” said John Richards, head of debt markets strategy for the Asia-Pacific region at Royal Bank of Scotland Plc in Tokyo, who predicts a move in December or January. “There is little to be gained by waiting.” The Fed yesterday said it will target a federal funds rate of between zero and 0.25 percent in an unprecedented move, causing the dollar to fall as low as 88.68 against the yen, near 88.53 reached on Dec. 12, the weakest since August 1995. The Fed’s benchmark was last lower than the Bank of Japan’s in 1993. More Likely “As a result, the BOJ is now more likely than not to cut the policy rate to 0.10 percent this Friday, in addition to implementing liquidity provision measures,” said Tomoko Fujii, head of economics and strategy at Bank of America Corp. in Tokyo. JPMorgan, Mitsubishi UFJ Securities Co. and Capital Economics Ltd. also brought forward their predictions for a rate cut to as soon as this week after the Fed’s decision. The Bank of Japan should take “appropriate” action after the yen’s surge, Chief Cabinet Secretary Takeo Kawamura said today. Finance Minister Nakagawa said yesterday that he hopes “the BOJ considers economic conditions and the liquidity problems and reaches a conclusion” on what to do. The Bank of Japan Law guarantees the central bank’s independence from the government. Nakagawa said today that he’s “not that concerned” about the yen’s gains since the Fed move and the government isn’t considering intervening in the currency market now. ‘Severe’ Economy Japanese banks’ borrowing costs fell today for the first time in 28 days, halting the longest increase since July 2006, on speculation the central bank will lower rates this week. The Tokyo three-month interbank offered rate, or Tibor, decreased to 0.921 percent from a decade high of 0.922 percent yesterday. The central bank’s Tankan report this week showed corporate sentiment plunged the most in 34 years as the global recession weakened exports. The survey “clearly showed that economic conditions are severe” and could get even worse as companies struggle to raise funds, Shirakawa told lawmakers yesterday. “The Bank of Japan knows that it needs to cut the rate soon, given that the economy is rapidly deteriorating,” said Teizo Taya, an adviser to Daiwa Institute of Research and a former central bank board member. “Investors think that they will have to move sooner or later even if they don’t do it this week. Government pressure is also fueling the view.” ‘Last Resort’ Prime Minister Taro Aso is increasing spending to lift his declining approval rating and spur growth, risking the expansion of the world’s largest public debt. Last week he pledged money to help unemployed people as exporters including Sony Corp. and Toyota Motor Corp. fire workers. He also unveiled a plan to buy commercial paper to improve financing for businesses. Aso is “turning to the central bank as a last resort, as fiscal constraints and his weakening political position limit his options,” said Mari Iwashita, chief market economist at Daiwa Securities SMBC Co. in Tokyo. Since the Oct. 31 rate cut, Shirakawa has said at least eight times that further reductions may impede the flow of funds in the money market by diminishing returns and making it unprofitable to trade. He isn’t alone: European Central Bank President Jean-Claude Trichet said this week that there’s a limit to how far the ECB can cut rates and signaled it may pause in January. Still, yesterday Shirakawa indicated that the option of pushing rates to zero percent remains open. “I am not going to predetermine that measures should or shouldn’t be used,” he said, when asked whether policy makers would consider reintroducing a 2001-2006 policy of pumping cash into the economy while holding borrowing costs near zero. The central bank will implement policy “appropriately,” he said. Lawmakers yesterday asked Shirakawa in parliament whether he would consider buying commercial paper. While reiterating that the bank is considering all its options and will implement policy flexibly, the governor said purchasing corporate debt may put a strain on its balance sheet. To contact the reporter on this story: Toru Fujioka in Tokyo at tfujioka1@bloomberg.net

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