TOKYO (AFX-ASIA) - Bank of Japan governor Masaru Hayami said the recent sharp drop in stock prices and the slowing U.S. economy affected today's decision to lower short-term interest rates.
"A 10 basis point rate cut will have a big effect on the economy but I think more than 10 points will conflict with the market mechanism," he said, noting that he proposed today's cuts.
"Japanese stock prices remain sluggish and the future course of corporate capital spending has become a concern, resulting in a further slowdown in Japan's economic recovery.
"Considering those recent conditions, I think the economic downside risk has heightened since the previous meeting.
"I would like to watch closely today's remarks by (U.S. Fed chairman) Alan Greenspan before the Senate to see whether the U.S. economy will develop from now on," he said.
"But I think the U.S. economy will continue to be strong, even if production, inventories and the stockmarket show a temporary deterioration."
Asked whether he will decide to further lower rates at the next meeting, Hayami said: "The next time we might raise rates, rather than further lowering rates, depending on the situation."
On whether Japan faces falling into a deflationary spiral, he said: "There is such a possibility. Therefore, we decided to cut rates to increase the provision of liquidity into the money market."
He added: "I think that in the process of economic structural reform going forward, corporate bankruptcies will definitely happen. So we took the steps to cope with such a possibility.
"Uncertainty over future economic conditions are increasing," he added.
Hayami stressed the importance of Japanese banks promoting structural reforms in order that they can increase lending to companies.
"Economic stimulus measures and structural reforms are not separately pursued," he said.
Hayami added that the BoJ will watch closely market and economic conditions and take necessary steps.
"We will continue outright purchase of long-term bonds at the current 400 bln yen per month pace but we will consider whether to increase purchases exceeding that level depending on the future situation."