Japan Likely to Lower Discount Rate to 3% Today : Central Bank President Denies U.S. Had Role in Cut, the 4th This Year

TOKYO —  Bowing to American pressure, the Bank of Japan is expected today to announce a reduction in its central discount rate to an all-time low of 3%, a cut of half a percentage point.

Satoshi Sumita, the central bank’s president, hinted strongly at the reduction without specifically announcing it Thursday. He cited a decline in production and growing unemployment as the reasons for the unexpected policy changes after months of insisting that Japan’s economy was still performing well and did not need any boost from further cuts in interest rates.

The new rate is expected to take effect Saturday.

News that the bank is about to reduce interest rates sent prices on the Tokyo Stock Exchange soaring in their largest single-day gain in history. The stock market average rose 505.57 points to close at 17,010.95. Bond prices also rose sharply.

U.S. Influence Denied

Sumita said that the decision, which will be formalized later today by the central bank’s policy committee, is being made “independently” and asserted that he is not reacting to calls from the United States to carry out the reduction, the bank’s fourth this year, in the rate that it charges on loans to commercial banks.

But he added that “correcting our external imbalance through international cooperation is necessary.”

For months, Sumita had rejected public calls from both Secretary of the Treasury James A. Baker III and Federal Reserve Chairman Paul A. Volcker to lower interest rates. He argued that to do so at a time when most corporations already held excessive funds would only spur speculation in stocks and land without stimulating the economy.

Baker and Volcker, however, insisted that lower interest rates would spur investment, thus pulling additional imports into Japan and helping redress the United States’ trade deficit with this country, an imbalance that is heading toward $60 billion this year.

Total Drop of 2 Points

The 3.5% rate that the bank fixed when it last lowered the discount rate in April had reduced the rate to the same post-World War II low that prevailed between March, 1978, and April, 1979. With the new reduction, the rate will stand 2 percentage points lower than at the beginning of the year.

It will also fall below the 3.5% central discount rate in effect in West Germany, another country that U.S. officials have been pressing to lower interest rates. The rate in the United States is now 5.5%.

A recent plunge in Tokyo stock prices and signs of new strength in the U.S. dollar gave the Japanese central bank what analysts called leeway to reduce interest rates at this time without spurring new speculation in stocks or strengthening the yen.

Each time the bank carried out its three earlier reductions of the discount rate this year, the yen, contrary to expectations, gained strength.

The Tokyo stock average had lost 13% in value, declining to 16,505.38 Wednesday, compared with a peak of 18,936.24 on Aug. 20. The dollar, meanwhile, suddenly rose 6.95 points--a 4.5% gain--over a period of six trading days, reaching 161 yen Monday on the Tokyo Foreign Exchange Market. On Thursday, the dollar closed at 159.90.

Key Industries Hurt

In explaining his change of heart, Sumita cited reports made Tuesday by Bank of Japan branch managers about how the deflationary effects of the yen’s 51.3% appreciation against the dollar since Sept. 22, 1985, had spread throughout the country and were affecting even the strongest industries, such as automobiles, electronics and steel.

Japanese exporters, who 13 months ago were receiving 242 yen for each $1 worth of exports, must now charge American buyers $1.51 for the same products to earn 242 yen. In practice, according to the Bank of Tokyo, manufacturers have raised their prices, on average, by only enough (to $1.26) to earn 201 yen for each unit of exports previously worth $1.

Earlier, Sumita had insisted that continuing investments by non-manufacturing firms, a healthy trend in housing construction, and firm consumer spending were keeping the economy on track.

Analysts Skeptical

On Thursday, he said, “With a reduction in interest rates and a stabilized foreign exchange rate, we can spur investment.”

Economic analysts, however, said that the interest rate reduction will provide only a “psychological prop” to modest pump-priming measures in a supplementary budget adopted Tuesday by Prime Minister Yasuhiro Nakasone’s Cabinet. It added 1.5 trillion yen ($9.38 billion) worth of national public works spending to spur growth.

Although Nakasone has refused to revise a government forecast for 4% real growth in fiscal 1986, Tetsuo Kondo, director of the Economic Planning Agency, told Parliament before the pump-priming measures were adopted that growth is likely to be limited to 2.8%.