Bank of Japan plays down coordinated rate cut talk

By Yuzo Saeki and Leika Kihara

TOKYO (Reuters) - The Bank of Japan played down speculation on Tuesday it would join other central banks in interest rate cuts to contain the global financial crisis, saying any easing would depend on the state of Japan's economy.

The BOJ held its benchmark interest rate at 0.5 percent, as analysts had expected, and signaled it had grown more cautious about Japan's economic recovery and the market upheaval that threatens to rupture the global financial system.

But Governor Masaaki Shirakawa poured cold water on talk that Japan would join a round of coordinated interest rate cuts as speculation reached fever pitch on Tuesday after the Reserve Bank of Australia made its biggest rate cut in 16 years.

"Policy coordination that would involve measures unsuitable for each nation's economic and price conditions would be undesirable," Shirakawa said at a news conference.

Coordination did not need to involve rate cuts and could involve working together with other central banks to supply markets with liquidity, he said.

The BOJ has joined the U.S. Federal Reserve and other central banks in the industrialized world in pouring cash into money markets to prod banks into lending to each other again after a freeze triggered by U.S. bank failures.

With its interest rates closer to zero than any other central bank in the Group of Seven rich nations, the BOJ could lose room for maneuver by cutting interest rates too early.

"I think Shirakawa does not want to cut interest rates," said Hideo Kumano, chief economist at Dai-ichi Life Research Institute.

Speculation that the G7 would agree on a coordinated response, including rate cuts, to the financial turmoil gained momentum on Monday and helped Wall Street erase some of its biggest intraday losses on record.

A committee of top financial regulators that President George W. Bush convened to address the crisis said policymakers around the world needed to use all tools available "in forceful and coordinated ways."

Japanese Finance Minister Shoichi Nakagawa said Japan would look to work closely with the rest of the G7, which holds talks on Friday in Washington.

"I'm racking my brains for what Japan can do, while collaborating with other members, because we have our own experiences from the past," he said.

HALLMARKS OF A RECESSION

While Japanese banks have largely escaped the worst of the crisis, bank failures in the United States and Europe are shattering confidence in Japan's export markets, accelerating an economic slowdown that already bears the hallmarks of a recession.

Japan's economy shrank more than initially estimated in the second quarter to log its worst performance in seven years as exports and capital spending, the main drivers of growth, were hit by the global slowdown.