Japan's central bank could hold rate steady as economy slows

London: Weak Japanese GDP data, following a shock fall in US job creation, hardened prospects that the Bank of Japan (BoJ) will hold interest rates steady and the Federal Reserve will cut them to temper the worst effects of a credit crisis.

Central bankers, gathered in the Swiss city of Basel for regular talks on Monday, registered their concern that the upheaval, stemming from mass defaults on US subprime mortgages lent mainly to poor people, would inflict wider economic pain.

"To the extent that this affects the real economy and in particular the US economy then we will see that the second round effects are likely to impact the whole world," Mexico's Central Bank governor Guillermo Ortiz said.


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Japan's economy contracted more than expected in the second quarter, reinforcing views that the BoJ is unlikely to raise rates anytime soon amid a global credit squeeze.

Economists had expected a weak number but the 0.3 per cent fall was bigger than the market forecast for a 0.2 per cent contraction.

That followed data on Friday showing US payrolls shrank in August for the first time in four years, suggesting the credit squeeze was beginning to stifle growth there. While the Japanese GDP number disappointed, finance minister Fukushiro Nukaga said he expected the economy to continue recovering and did not think Japan would be hit hard by the global financial turbulence.