TOKYO -- Fearing that higher borrowing costs could choke off business activity, Japan moved again Tuesday to lower interest rates in the latest effort to repair damage to the world's second-largest economy.
Finance Minister Kiichi Miyazawa announced that the government would cut back its sales of 10-year bonds by about 22 percent, making up some of the difference with sales of bonds with shorter maturities. The government also said that an agency that manages public pension funds would resume buying government bonds.
"These steps should have a positive impact on long-term interest rates," Miyazawa said.
The twin announcements were aimed at reversing a sharp decline in Japanese government bond prices that had forced benchmark interest rates higher, threatening to further cramp economic growth.
The moves came on the same day as the Economic Planning Agency reported the economy remains distressed and followed a cut Friday in a key short-term interest rate by the Bank of Japan, the country's central bank.
Financial markets cheered the government's efforts to rein in interest rates. The main Japanese stock index rose 1.3 percent and the price of the 10-year government bond soared, pushing its yield down to 1.99 percent from 2.14 percent late Monday.
U.S. markets also rallied. Yields on 30-year U.S. government bonds, a barometer for long-term borrowing costs for consumers and business, tumbled to 5.39 percent Tuesday afternoon from 5.42 percent on Friday, and stocks and the dollar followed bonds higher. U.S. markets were closed Monday for the Presidents Day holiday.
The United States has been urging Japan to shore up its economy as a way to help pull weaker Asian nations out of their own economic slump. Without Japanese banks lending in Asia or Japanese consumers buying Asian goods, many fear that the region may take even longer to recover.
In the latest sign that Japan's economic troubles run deep, the government's main economic forecasting unit, the Economic Planning Agency, issued a report Tuesday saying the outlook for Japan remains bleak despite scattered signs of improvement.
In its February report on the economy, the agency pointed to the lack of improvement in consumer spending, which continues to shrink as workers become increasingly frugal due to falling wages and record-high unemployment.
Weak domestic demand has put the Japanese economy, already mired in its worst recession since the end of World War II, in an "extremely severe" state, the planning agency said.
The report did note some bright spots -- such as a pickup in housing construction and a slowdown in the rate of bankruptcies -- but said these were doing little more than slowing the pace of decline.
The report also noted the risk from rising long-term interest rates, which could increase borrowing costs for Japanese companies and hurt exports by driving up the yen against other currencies.