Equities markets wound down to the holiday season, with big gains on Monday followed by erosion later in the week. The markets responded to some profit warnings but were remarkably sanguine about the escalating Argentinean crisis. Rather, the focus of the week was on Japan. The Bank of Japan met and loosened liquidity some to help the ailing economy. In their statement on the economy, the Bank once again lowered expectations for recovery any time soon. And the yen appeared to be successfully talked down by Japanese officials.

The European Central Bank, during its second meeting of the month, discussed issues other than monetary policy (which is discussed only during the first meeting of the month). However, in statements to the European Union Parliament, Bank president Wim Duisenberg reiterated that oft heard mantra - Monetary policy is appropriate for the foreseeable future. Translated that means that no rate cuts are in the offing after the first of the year despite very soft EMU growth prospects.

Unrest in Argentina and the departure of the country's president and economic minister caused few ripples in world markets. Investors have been alert to the long brewing financial crisis, and there has been little sign, at least so far, of the crisis weighing down other emerging markets. Share prices slipped for Spanish banks, which have broad exposure to Latin America. The reaction in currency markets overall has been muted. The deteriorating economy, which had been slowly sinking for quite a long time, had probably been priced into the markets to a certain extent. Investors have heeded lessons of past emerging markets crises and are better placed to cope with Argentinean debt default or currency devaluation than they were when Russia defaulted on debt and devalued its currency - moves that sent markets tumbling.

The Bank of Japan said it would pump more money into a banking system that hasn't increased lending in five years. It is the latest attempt by policy makers to pull Japan's economy out of recession. The Bank raised its target for reserves available to commercial banks. It also increased monthly government bond purchases by a third to 800 billion yen and made it easier for banks to use commercial paper as collateral for loans. While flooding the market with cash may weaken the yen and boost exports, the action may do little to revive growth as banks saddled with an estimated 151 trillion yen in bad loans balk at extending fresh credit. The Bank of Japan is trying new tactics after saying it has done all it can to boost the economy already. The bank's earlier steps - it cut interest rates to near zero in March and pumped trillions of yen into the banking system in recent months - haven't revived lending or growth.

Meanwhile, Japan's Prime Minister Junichiro Koizumi will make a record cut in spending in the next year beginning April 1, 2002 to rein in debt that's the highest of any industrialized nation, a sign he's determined to deliver promised reforms even if it means driving the economy deeper into recession. Next year's budget is the first test of whether Koizumi can meet election pledges to curb debt, scrap wasteful public-works projects and channel more funds into growing industries to create new jobs.

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