Tokyo rallies after US interest rate cut

A powerful rally in Tokyo stole the show in Asian stock trading today, but big European markets opened with losses in response to last night’s US interest rate cut.

Traders worldwide were disappointed with the half-point rate reduction announced by the US Federal Reserve. Many had been looking for a cut of 0.75% to help keep the US economy from slipping too badly.

But Japanese traders quickly shook off concerns the cut was not big enough. They pushed Tokyo shares up by almost 7.5% amid speculation the government was buying into the market to prop up prices.

Japan’s stumbling economy has long been a global worry, but a recent reduction in Japanese interest rates to almost zero plus the announcement of planned measures to reduce bad bank debts helped propel the market sharply higher.

Traders said government pension funds also stepped in to buy, giving shares an extra boost.

The 225-issue Nikkei Stock Average finished with a gain of 7.49% at 13,103.94 points.

"I think people are taking a bit of a gamble that this is a harbinger of good things ahead," said Peter Morgan, chief economist at HSBC Securities in Tokyo. "I was a bit shocked."

European traders had pushed prices higher yesterday in anticipation of a larger interest rate cut but they began selling today after learning they had called it wrong.

London blue chips fell almost 1.8%, while shares in Frankfurt slipped by 1.3% and Paris prices were down by about 1.7% in early dealings.

Despite drops of 2.4% by the Dow Jones industrial average and 4.8% by the Nasdaq composite index on Tuesday, the damage in Asia came quickly under control.

"Overall it’s not that bad in the region," said Tan Kim Chye, an analyst at the brokerage G.K. Goh in Singapore, where shares fluctuated before closing with a loss of 0.2%.

Tokyo’s rally helped pull prices in Seoul slightly higher by the close, with the Kospi index up about 0.2% after reversing early losses.

Hong Kong’s Hang Seng Index fell by 0.5%, bouncing most of the way back from its morning loss of 2%. Hong Kong’s dollar is pegged to the US dollar and its banks are expected to match the US interest rate cut, which would help the crucial local real estate market.

"A 50-basis-point cut is extremely good for Hong Kong," said David Williamson, sales director at China Everbright Securities. "It’s the best thing."

The larger cut many traders had hoped for would have sent "a message to markets that the US is in really bad trouble," he said. "The markets may need 75 basis points but maybe the economy doesn't," Williamson said.