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.

In an effort to boost Japan’s deteriorating financial system and reinvigorate its flagging economy, the Bank of Japan cut its discount rate today by three-quarters of a percentage point to 2.5%.

In announcing the rate cut, central bank Governor Yasushi Mieno said he was concerned that “consumer and corporate spending has become increasingly sluggish.”

The move was quickly welcomed in Washington “in light of recent economic conditions,” Treasury Secretary Lloyd Bentsen said in a statement. “It should help to strengthen domestic demand and in turn help shrink Japan’s very large external surplus. And it will assist in strengthening world economic growth.”

The rate cut, the sixth since July, 1991, brings Japanese interest rates down to the record low rates of 1987 that helped ignite an explosion of economic growth.

But analysts said that this time the rate cuts are unlikely to spark a quick recovery. “You can’t expect any immediate magic from this rate cut,” said Yasunori Takahashi, senior economist at the Industrial Bank of Japan.

Nevertheless, Takahashi said, the lower interest rates are critical to help bail out banks suffering under a growing burden of bad debt.

According to one estimate, the rate cuts will mean an additional $80 million a month in income for Japan’s largest half-dozen banks. The discount rate is the rate that Japan’s central bank charges on loans to commercial banks.

The move had been anticipated for several days, but still spurred a modest rally on the stock market. The 225-share Nikkei average closed the morning session today up 34.52, ending at 17,256.55. Lower interest rates usually make stocks more attractive in comparison to bank deposits.

However, economists say lower rates will do little to boost corporate investments--Japan’s most critical engine of growth--because companies are already suffering from huge overcapacity.

Takeshi Nagano, president of the Japan Federation of Employers’ Assns., called Wednesday for a $40-billion income-tax cut, adding his voice to a chorus of government and business leaders demanding Japan put together a new package of stimulative measures.

Japanese businesses currently have an estimated 1 million too many employees, but will not be able to bear that burden much past the end of the year, Nagano said. Layoffs may result, he indicated.

Japan is in the midst of its longest downturn since World War II, having just experienced three consecutive quarters of economic decline.

In December, the Economic Planning Agency slashed its growth forecast for the year ended March 31 to 1.6%, down from 3.5%.

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