Oct. 7 (Bloomberg) -- Bank of Japan Governor Masaaki Shirakawa downplayed speculation that the central bank may cut interest rates in concert with its overseas counterparts.

``It's appropriate for each nation to make a judgment based on its own economy and prices,'' Shirakawa said at a press conference in Tokyo after his board left the key interest rate at 0.5 percent. Any coordinated action that doesn't reflect this would be ``undesirable,'' he said.

Asian stocks rebounded after Australia cut its benchmark rate by one percentage point today, prompting speculation other countries will follow to unlock credit markets. Morgan Stanley and Goldman Sachs Group Inc. said Japan may reduce borrowing costs this quarter as the global credit shortage intensifies.

The governor's remarks ``underscored that the bank may be unlikely to ease for the time being,'' said John Richards, head of debt strategy for the Asia-Pacific region at RBS Securities Japan Ltd. in Tokyo. ``Shirakawa signaled that Japan would march to its own monetary tune.''

The best way for central banks to counter the global financial crisis is to provide liquidity, Shirakawa said. The BOJ pumped 23 trillion yen ($225 billion) into the financial system over the past three weeks, the most in at least six years, as banks stored cash on concern other financial institutions may follow Lehman Brothers Holdings Inc. into bankruptcy.

Australia Rallies

The yen traded at 101.59 per dollar at 6:32 p.m. in Tokyo from 102.67 shortly before the announcement. The Nikkei 225 Stock Average fell 3 percent to 10,155.90 after earlier dipping below 10,000 for the first time since December 2003.

Australia's benchmark stock index rallied from an earlier loss after the rate cut, the biggest since 1992.

European Central Bank President Jean-Claude Trichet last week said his board discussed cutting interest rates. Central bankers and finance ministers from the Group of Seven nations meet in Washington on Oct. 10.

Shirakawa acknowledged that Japan's economic recovery ``may be delayed slightly compared with our initial expectations.''

``Strains in global financial markets have risen significantly and if this lingers, it may have a significant effect on the economy,'' he said.

Business Pessimism

Sentiment among large manufacturers dropped to a five-year low in September, the bank's quarterly Tankan business survey showed last week. Shirakawa said the report showed signs of some excess in labor and production capacity.

``Economic growth has been sluggish and these conditions may persist for some time given that the slowdown in overseas economies is becoming clearer,'' the central bank said.

The policy board still sees a recovery emerging eventually as energy costs ease and markets abroad pick up.

``Although there are substantial uncertainties, the economy, in the longer run, is expected to return gradually onto a moderate growth path,'' they said.

Morgan Stanley cut its growth forecast for Japan today, saying the economy will shrink in the year ending March 31 as companies cut investment and global credit dries up.

``With overseas economies facing liquidity issues, we anticipate a wave of freezes or reductions in capital spending plans, which is likely to affect domestic consumption,'' said Takehiro Sato, chief Japan economist at Morgan Stanley in Tokyo.

Bank of Japan board members will probably cut their growth estimates for the current and next fiscal years in a report on Oct. 31, Sato said. The BOJ forecasts growth of 1.2 percent for the year ending March 31 and 1.5 percent for the following year.

Rate Cut Speculation

Deepening market turmoil in recent days has increased expectations for a rate cut. Investors see a 23 percent chance the bank will lower borrowing costs by December, according to JPMorgan Chase & Co. calculations using overnight interest-rate swaps. The odds of a reduction by March are 35 percent.

``We expect the BOJ to ease monetary policy by 25 basis points as early as October-December in response to growing downside economic risk and tightening financial conditions resulting from yen appreciation and the stock-market decline,'' said Tetsufumi Yamakawa, chief Japan economist at Goldman Sachs, who also cut his growth forecast for Japan today.

Izuru Kato, chief market economist at Totan Research Co. in Tokyo, said a rate cut would provide little support for the economy, though it can't be ruled out ``if global financial turbulence exacerbates.''

Other analysts say a reduction won't be an easy option for a central bank that describes local monetary conditions as ``accommodative.'' The bank reiterated today that should ``downside risks'' decrease, keeping rates low for too long may overstimulate the economy.

``Given that BOJ board members consider current interest rates sufficiently accommodative, they wouldn't casually choose to cut rates,'' said Jun Ishii, chief fixed-income strategist at Mitsubishi UFJ Securities Co. in Tokyo.

To contact the reporter on this story: Mayumi Otsuma in Tokyo at motsuma@bloomberg.net

Last Updated: October 7, 2008 05:42 EDT