BOJ holds rates, eyes market operations

By Leika Kihara

TOKYO (Reuters) - The Bank of Japan held back from a rate cut on Friday and tweaked its market operations to ease funding pressures towards the end of the year, as it assesses the growing economic fall-out from the financial crisis.

As recession spreads through the developed world, including Japan and the euro zone, the central bank warned of downside risks to the European and U.S. economies and said the hard times would last for a while with inflationary pressures easing.

"The outlook remains highly uncertain and given the slowdown in overseas economies and the turmoil in global financial markets, it will likely take some time for the necessary conditions for Japan's economic recovery to be satisfied," the BOJ said in a statement.

Finance Minister Shoichi Nakagawa expressed concern about market turmoil after Wall Street stocks slid to decade lows on Thursday, and said he would cooperate with the BOJ on possible measures to prop up Japan's stock market and economy.

Eyeing end-of-year pressures in financial markets, the central bank also said it may buy commercial paper more flexibly under repurchase agreements to aid corporate financing and would consider changes in funding operations that are collateralised with corporate debt.

Switzerland's central bank made a shock interest rate cut of one full percentage point on Thursday, and analysts say a weak U.S. labour market almost guarantees that the Fed will cut rates again at its next meeting on Dec. 15-16.

The BOJ cut its benchmark rate by 20 basis points to 0.3 percent last month, and economists say it may consider another cut either next month or early next year.

"The BOJ's move on enhanced market operations highlights the bank's focus on easing tension in corporate financing, taking into account that companies are increasingly struggling to raise funds especially as the year-end draws closer," said Shinsuke Kanabu, joint general manager at money broker Central Tanshi.