Japan Cuts Its Discount Rate to Stem Slump : Policy: Analysts say it will help financial institutions burdened with problem loans, but no turnaround is expected soon.

The Bank of Japan early today cut Japan’s official discount rate to 2.5% from 3.25%, a move expected to help stem a further slump in the economy.

But some economists said the rate cut will not give the economy an immediate boost.

“In the current situation, where the degree of downturn has been intensifying, a rate cut would help halt the downturn,” Sumitomo Bank chief economist Toshio Ito said. “But monetary policy takes time to have an effect, and we can’t expect such a policy alone to improve the economy soon.”

Politicians and businessmen have been pressing for a rate cut, and markets have been discounting the move.

Japan’s mighty economy has been in the doldrums for more than a year. In December, the Finance Ministry trimmed its official economic growth forecast for the year ending March 31 to a mere 1.6%, from 3.5%.

Economists said a rate cut to 2.5%--the same level as the historic low maintained during the height of the “bubble” economy of soaring land and share prices--will help ease the pain at financial institutions struggling under a burden of problem loans.

“It will not jump-start the Japanese economy. The secular and cyclical problems are too severe to spark a new expansionary cycle,” said Jesper Koll, economist at S.G. Warburg Securities.

“But a cut to 2.5% is a step in the right direction because it immediately helps heal the Achilles’ heel of the Japanese economy--the financial system,” he said.

Providing relief for banks by cutting their funding costs is an essential precondition for a broader recovery, economists said.

“We will have to first and foremost see a recovery of the financial system, then a recovery of money supply, and then we can start to forecast with confidence an actual economic recovery,” Koll said.

Lower interest rates could also help boost flagging consumer spending on housing and other goods, but not until much later this year, some economists said.

“You have to get people spending,” Baring Securities economist Geoffrey Barker said. “By mid-1993, residential property prices will be back to normal, pre-bubble affordability. We can see the light at the end of the tunnel for asset deflation for households, and then interest rates can begin to bite.”

A recovery in corporate capital spending, however, is not likely to come until even later, given the massive excess capacity built up by Japanese corporations during their late-1980s investment spree.

Attention is likely to shift to the debate over what fiscal measures the government should take to boost the economy.

“The rate cut is a supportive measure for the period during which the fiscal stimulus debate continues,” said Soichi Enkyo, economist at the Bank of Tokyo. “It supports sentiment and keeps things from getting worse.”

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