Japan poised for rate cut

BY PAUL WALLACE

Economics Editor

The Bank of Japan appears poised to cut the official discount rate, unchanged since September 1993, to counteract the deflationary impact of the soaring yen on the economy.

The move is expected to come as early as next week. In early morning trading in London, the dollar clocked up another low, falling to 83.75 yen and closing at 84.25.

But while the Japanese may be about to cut rates, the likelihood of a tightening of monetary policy in the US receded with a further pointer to a slowdown in the American economy. The unemployment rate rose from 5.4 to 5.5 per cent in March and payrolls rose by less than expected. The figures were weaker than expected, raising hopes that the Federal Reserve has already raised interest rates enough to bring the economy off the boil.

The markets had expected the unemployment rate to remain unchanged and non-farm payrolls to rise by 225,000. In the event, employment rose by a little over 200,000, with growth concentrated in services and construction.

For the first time since 1993, the number of jobs in manufacturing fell, a significant development because the sector has performed particularly strongly in the current upswing.

The data were interpreted by Julian Jessop, of HSBC Greenwell, as further evidence that annual GDP growth in the first quarter would come down to around 2 per cent, an abrupt deceleration from the 5-per cent rate notched up in the final quarter of last year. That would put the economy on path for a projected slowdown to just over 1 per cent growth next year.

The alternative view is that the economy could simply be taking breath before a further sprint. William Sterling, international economist with Merrill Lynch in New York, warned of the "underlying momentum" in an economy that was "still humming". With banks lending again in a big way, the economy could pick up speed again.

The employment figures initially cheered the US Treasury market, but by lunchtime in New York bonds lost early gains. They did little to encourage sentiment in the foreign exchange markets, which, said Lee Ferridge at NatWest Securities, were still "trading in panic mode" due to the downward spiral of the dollar.