Japan recession deepens, China cuts rates

British central bankers said interest rate cuts alone would not cure growing global economic ills that began with a crisis in the U.S. housing market and has toppled major global financial institutions.

But figures showing the deepest plunge on record in euro zone industrial new orders were sure to fire expectation of more rate cuts in Europe.

The People's Bank of China announced its fifth cut in lending rates since mid-September, underlining the scale of problems facing the world's fourth-largest economy and the only major one that is still growing

"The economy is slowing more sharply than expected and I think that's why the central bank rushed to cut rates again now," Xing Ziqiang, economist at China International Capital Corp in Beijing said.

The cost of one-year bank loans would fall to 5.31 percent from 5.58 percent, while the benchmark one-year deposit rate falls to 2.25 percent from 2.52 percent.

The world's second biggest economy Japan, which slashed interest rates to a rock-bottom 0.1 percent last week, reported the biggest ever drop in exports in November.

Interest rates were lowered almost to zero in the United States and Japan last week, but British central bankers -- who have cut rates by three percentage points since October -- warned that policy alone would not solve the financial crisis.

Bank of England Deputy Governor Sir John Gieve said Britain needed some form of new policy tool beyond the "blunt instrument" of interest rates and his colleague, Tim Besley, said monetary policy was not enough to bring Britain's flagging economy back to life.

"We need to develop some new instruments, which sit somewhere between interest rates, which affect the whole economy ... and individual supervision and regulation of individual banks," Gieve told the BBC, without elaborating.

Traders and analysts polled by Reuters believe the Bank of Japan will early next year return to a policy, which it abandoned only in 2006, of flooding banks with cash to inflate the economy.

The U.S. Federal Reserve ventured into that territory last week, slashing its benchmark funds rate to a range from zero to 0.25 percent and promising to supply banks with unlimited cash and keep rates low over an extended period.

Pessimism about the global auto market, as well as banks, prompted a 1.3 percent fall in European shares while U.S. stock futures were flat ahead of the Wall Street open.

European Union statistics office Eurostat said October euro zone orders fell by 4.7 percent from September for an annual fall of 15.1 percent -- the deepest year-on-year fall on record.

The main reason was a 9.4 percent monthly and a 33.3 percent annual fall in orders for transport equipment.

Japan's November exports plunged 26.7 percent from a year earlier, hit by a strong yen and sagging demand for its goods in key U.S. and Asian markets, including China.

A source said China's US$1.9 trillion reserve stockpile shrank in October, which some economists say may mark a potentially worrying reversal to capital outflows.

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