By Tetsushi Kajimoto and Leika Kihara
TOKYO (Reuters) - Japan's central bank meets on Thursday poised to drive rates close to zero to help the economy hit hard by crumbling global demand, a decline underscored when OPEC's biggest ever supply cut failed to lift oil prices.
The Bank of Japan is expected to cut interest rates from already rock-bottom 0.3 percent on Friday after the U.S. Federal Reserve's dramatic rate cut, but stop short -- for now -- of reviving a policy of flooding markets with massive amounts of cash.
The Fed slashed U.S. rates to 0-0.25 percent, pushing the dollar down to a 13-year low near 87 yen on Wednesday and adding pressure on Japan's central bank to join another round of rate cuts when its policy meeting ends on Friday.
The Philippine central bank was also expected to leap into action on Thursday, possibly trimming rates by half a percentage point to help spur economic growth.
The severity of the global economic downturn sparked by the U.S. mortgage market meltdown last year prompted policymakers to look for unconventional tools after many have already slashed rates to historic lows and rushed out massive stimulus packages.
Bank of England Deputy Governor Charles Bean said in an interview with the Financial Times zero rates were also a possibility in Britain, on its way to its first recession since 1990s.
After a recent string of gloomy data, Japan's government was set to downgrade its assessment of the recession-hit economy in December, the Nikkei newspaper reported.
"If the BOJ shares the government's view on the financial situation, I expect the bank to take whatever steps are necessary," Finance Minister Shoichi Nakagawa told reporters.
Japanese authorities also warned of possible intervention to stem a surge in the yen, battering exporters, such as carmakers, already hit by collapsing global demand.
"We'll deal appropriately with it including currency intervention," Chief Cabinet Secretary Takeo Kawamura told a news conference.
SUDDEN FOREX MOVES
In a sign of the worsening woes, the head of Japan's auto industry lobby said that the yen's current strength would have a profound negative impact on domestic carmakers, saying he hoped foreign exchange markets would return to stability.
"Sudden forex moves, especially big ones, will not only hurt short-term corporate profitability but also make it very difficult for companies to make medium to long-term plans," Satoshi Aoki, chairman of the Japan Automobile Manufacturers' Association, told a news conference
Japanese demand for new vehicles will likely fall 4.9 percent in 2009, the group said, predicting the first drop below 5 million vehicles in 31 years.
The dollar was hovering at around 87.75 yen off its 13-year low and touched a 2-1/2-month low against the euro as the U.S. rate cut widened the interest rate differential in favor of the euro zone currency.
Expectations that the Bank of Japan and other central banks in the region will follow the Fed's lead and drive borrowing costs near record lows lifted bank shares in Tokyo and helped most stock markets in the region clock up moderate gains.
Japan's Nikkei average closed 0.6 percent higher and the MSCI index of stocks in Asia-Pacific outside Japan was up 1.3 percent by 1:30 a.m. EST.
Oil prices steadied at around $40 a barrel on Thursday, near its lowest in more than four years, a sign that slowing demand was trumping OPEC's biggest-ever production cut.
The Organization of the Petroleum Exporting Countries (OPEC), keen to build a floor under dipping prices, announced on Wednesday it would cut 2.2 million barrels daily of output starting January 1, slightly more than expected.
"The world economy is driving the price more than anything OPEC can do at this state," said Gary Ross, CEP of consultancy PIRA Energy. "It will be hard for the cuts to have any traction with regard to price in a deteriorating economic environment."
South Korea, one of Asian economies hardest hit by the global financial crisis, said on Thursday it would launch a 20 trillion won ($15.1 billion) fund in January to help banks replenish capital and encourage them to lend.
In Germany, the country's leading think tank Ifo is expected to announce another drop in its closely-watched business climate index after it hit a 16-year low last month.
(Additional reporting by Reuters bureaus worldwide; Writing by Linda Sieg; Editing by Tomasz Janowski)
