WORLD> Asia-Pacific
G7 fires warning shot on Japanese currency
(Agencies)
Updated: 2008-10-27 14:14

STERNEST TEST

South Korean policymakers took their most dramatic measures yet in a months long battle to buttress confidence in an economy facing its sternest test since the Asian financial crisis a decade ago.

The Bank of Korea cut its main interest rate by 75 basis points to 4.25 percent in an unscheduled meeting. The rate cut was the biggest on record and only the second emergency move since the bank adopted its current monetary policy system; the first was after the September 11, 2001 attacks on the United States.

"Their priority is to minimize the impact of the crisis on growth and on volatility. Eventually this could also help the markets," said Sebastien Barbe, senior economist and foreign exchange strategist with Calyon in Hong Kong.

President Lee Myung-bak pledged to increase government spending and to cut taxes to support Asia's fourth largest economy, which grew at the slowest quarterly pace in four years during the last quarter.

The Bank of Korea also cut rates earlier this month after major central banks including the Federal Reserve, the European Central Bank and the Bank of England delivered an unprecedented coordinated rate cut to halt the dizzying slide in markets.

The US Federal Reserve is widely expected to announce a 50 basis-point cut in overnight rates on Wednesday that would take its benchmark to 1 percent, the lowest since June 2004. Some analysts expect a reduction to 0.75 percent.

US economic growth is buckling under the impact of the crisis triggered last year by a meltdown in the US mortgage market.

Advance third-quarter US economic growth data due on Thursday is expected to show a 0.5 percent contraction in gross domestic product after 2.8 percent growth the previous quarter.

Most industrialized nations appear headed for recession and the picture looks set to darken after a series of profit warnings major international companies last week, including Japan's consumer electronics maker Sony, French carmaker PSA Peugeot Citroen and online retailer Amazon.com.

GOVERNMENTS REACH INTO MARKETS

In Japan, the world's second largest economy, the stakes rose as the country's largest banks began showing signs of stress.

Shares of Mitsubishi UFJ Financial Group and other big Japanese banks tumbled more than 10 percent on Monday, hit by concern they may need to raise billions of dollars each to replenish capital lost in the stock market slump.

Although Japanese banks have so far avoided the credit losses that tore through Wall Street, they have been hit hard by the volatile domestic stock market and weakening economy. The Nikkei is down 22 percent so far this month.

Mitsubishi UFJ, Japan's top lender, is considering raising up to 1 trillion yen ($10.8 billion) to shore up its capital, people familiar with the matter have said.