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Japan’s Central Bank Cuts Key Lending Rate to 4.5 Percent

December 30, 1991

TOKYO (AP) _ Japan’s central bank cut its official discount rate today from 5 percent to 4.5 percent to bolster a sagging economy.

The cut was the third this year in the key lending rate, which is what the Bank of Japan charges on loans to commercial banks. The bank also cut the discount rate by half a percentage point July 1 and Nov. 14.

Many analysts linked the central bank’s move with the Jan. 7-10 visit of President Bush, who is expected to seek action from Tokyo to reduce the huge trade surplus with the United States. Some Japanese officials have called for easier credit as a way to increase domestic demand for imports.

″There might have been strong political pressure on the central bank to lower its key lending rate before President Bush’s visit ... because no specific pump-priming measures have emerged yet from the Cabinet of (Prime Minister Kiichi) Miyazawa,″ said Susumu Nozaki, an economist with Tokai Bank.

But at a news conference this morning, Bank of Japan Governor Yasushi Mieno denied the bank’s action was connected to the visit.

″With the latest reduction there will be a substantial impact on corporate investment, which has cooled recently,″ said Nozaki.

Stocks rose strongly on the announcement. The 225-issue Nikkei Stock Average closed at 22,983.77, up 546.45 points, or 2.43 percent, in today’s half-day session.

The rate cut at first strengthened the dollar, which had plunged against the Japanese yen since the U.S. discount rate was cut by one percentage point to 3.5 percent earlier this month.

But by late morning the dollar was trading around the level of Friday’s close on expectations that the United States would follow suit and further cut interest rates.

The central bank’s rate cut is intended to spur Japan’s economic growth, which has been sluggish recently.

Some analysts predict growth next year will only be 2.2 percent to 2.5 percent, down from the International Monetary Fund estimate of 3.8 percent for 1991. A Bank of Japan survey last month showed that major manufacturers have revised their forecasts for pretax profits for the year ending March 31 sharply downward.

″It is the judgement of the bank that this action will provide sufficient monetary conditions for achieving more balanced non-inflationary growth,″ the central bank said in a statement.

″Bearish sentiment is spreading among investors as growth decelerates,″ said Trade Minister Kozo Watanabe. ″In such circumstances, we believe this measure is timely.″

The Finance Ministry, which included a $5.62 billion tax increase in the fiscal 1992 budget recently approved by the Cabinet because of declining tax receipts, welcomed the move.

″This cut in the discount rate will have a desirable impact on all facets of the economy,″ Finance Minister Tsutomu Hata said in a statement.

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