Japan's recession deepens, bankers look beyond rates

Japan yesterday warned it was sliding deeper into recession after exports and business sentiment tumbled, and British central bankers said interest rate cuts alone would not cure global economic ills.

The world's second biggest economy, which slashed interest rates to a rock-bottom 0.1 per cent last week, reported the biggest ever drop in exports last month.

Japan's industrial champion and the world's top carmaker, Toyota Motor Co. forecast its first ever group operating loss of €1.2 billion - due to a collapse in global demand and a crippling rise in the yen.

Interest rates were lowered almost to zero in the US and Japan last week, but British central bankers - who have cut rates by three percentage points since October - warned that policy alone would not solve the financial crisis.

Bank of England Deputy Governor Sir John Gieve said Britain needed some form of new policy tool beyond the "blunt instrument" of interest rates and his colleague, Tim Besley, said monetary policy was not enough to bring Britain's flagging economy back to life.

"We need to develop some new instruments, which sit somewhere between interest rates, which affect the whole economy ... and individual supervision and regulation of individual banks," Sir John told the BBC, without elaborating.

Traders and analysts polled by Reuters believe the Bank of Japan will early next year return to a policy, which it abandoned only in 2006, of flooding banks with cash to inflate the economy.

The US Federal Reserve already ventured into that territory last week, slashing its benchmark funds rate to a range from zero to 0.25 per cent and promising to supply banks with unlimited cash and keep rates low over an extended period.

In Ireland, shares in the three main banks soared following a €5.5 billion government injection that leaves one of them under state control.

The government announced last Sunday it would make an initial investment of €1.5 billion in Anglo Irish Bank, giving it 75 per cent control of the lender.

Dublin will also invest €2 billion each in market leaders Bank of Ireland and Allied Irish Banks. Pessimism about the global auto market, as well as banks and oils, contributed to a 1.8 per cent fall in European shares.

Adding to the gloom, a Reuters Tankan survey showed business sentiment at the lowest in its 10-year history and Bank of Japan Governor Masaaki Shirakawa said the worst was yet to come.

"The Japanese economy is deteriorating and for the time being its conditions are likely to become more severe," he told business leaders.

The government's monthly economic report summed it up in a similar vein. "Economic conditions are worsening," it said, the first time it used such an expression since February 2002.