INSTANT VIEW: Bank of Japan seen considering rate cut

TOKYO (Reuters) - The Bank of Japan will consider cutting interest rates at a policy meeting this week, a source informed on the matter said on Wednesday.

News of a potential cut in Japanese rates to 0.25 percent pushed up Tokyo stocks and dragged on the yen, overshadowing an unexpectedly large rise in Japanese industrial output.

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KEY POINTS:

-- Source tells Reuters that the Bank of Japan is considering a rate cut at its regular one-day meeting on Friday, but was watching market conditions before making a final decision.

-- Hopes of a rate cut pushed Japan's Nikkei share average, which fell to a 26-year low this week and has halved this year, up 7 percent.

-- Industrial output fell 1.2 percent in the third quarter, the third straight quarter of decline.

-- Output rose 1.2 percent in September, above a median market forecast for a 0.5 percent gain.

-- Manufacturers' output, the core component of production, is expected to fall 2.3 percent in October and 2.2 percent in November, the Ministry of Economy, Trade and Industry said.

COMMENTARY:

JUNKO NISHIOKA, ECONOMIST, RBS SECURITIES JAPAN

"Although output in September rose, the outlook for October and November suggests output in the final quarter of this year could fall as much as 4 percent from July-September. Declines in output could accelerate ahead.

"The Bank of Japan could seriously consider a rate cut this week. The main reason for this is the sharp rise in the yen. The bank will do what it can do to weaken the yen-rising pressure."

NORIO MIYAGAWA, ECONOMIST, SHINKO RESEARCH INSTITUTE

"The September output data was not as bad as expected but manufacturers' outlooks for October and November output falls are severe. This indicates they are seeing that not only the economic deterioration in the U.S. but also that of Europe and emerging markets will affect on Japan's exports.

"Japan's industrial output is likely to continue to stay in minus figure for at least January-March period although the level of decline may be moderate.
"It is still an open question whether the Bank of Japan will lower interest rates. But considering recent rapid moves in stocks and forex markets and the U.S. economic downturn, it would not be a surprise if the BOJ lowers rates.

TAKUMI TSUNODA, SENIOR ECONOMIST, SHINKIN CENTRAL BANK

RESEARCH

"Output has clearly entered an adjustment phase, as exports were clearly slowing down in August and September. As the world economy is expected to slow further in October-December, an adjustment in Japanese output during that period will be quite severe."

"As the U.S. economy is expected to be stagnant at least until the first quarter of next year, output will remain weak for the time being."

"I think the BOJ will cut rates. That would have some effect in curbing the yen's rise."

MARKET REACTION:

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LINK:

-- To view a table of industrial output data, click on

http://www.meti.go.jp/english/statistics/index.html

BACKGROUND:

-- Industrial output has been weak as the global economic slowdown and financial turmoil hit exports and corporate activity, which had offered key support to an economy now on the brink of a recession.

-- A decline in July-September output would mark the third consecutive quarter of falls. That marks the longest such sequence since four consecutive quarters of decline in 2001, when Japan was in recession.

-- For more than half a century, two quarters of declining industrial production have signaled a recession in Japan.

-- Japan measures a recession as a downturn in the economic cycle, which varies from the more widely used definition of two straight quarters of economic contraction.

(Reporting by Tetsushi Kajimoto)