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Sid Shniad wrote:
> The Globe and Mail Report on Business February 18, 1999
>
> BANK OF JAPAN PUSHES SHORT-TERM RATES NEAR ZERO
>
> Move bolsters perceptions the government in Tokyo has
> exhausted conventional means of boosting its economy
>
> Bill Spindle, Jathon Sapsford
> The Wall Street Journal, Tokyo
>
> The Bank of Japan drove short-term interest rates to almost
> zero yesterday, the most recent indication the bank has begun a
> shift from conventional interest rate policy to focus on expanding
> the country's money supply.
> The move helped drive the yield on the benchmark
> long-term bond down to 1.925 per cent from 1.985 per cent on
> Tuesday. The yen also weakened on the news to more than 118 per
> U.S. dollar, compared with 117 a day earlier.
> The central bank's decision to push the interest rate it most
> directly controls to 0.08 per cent from 0.15 per cent — and central
> bank Governor Masaru Hayami's comments this week that even a
> rate of zero would be acceptable — may be one of the first steps in
> a policy shift toward more aggressively printing money to break a
> deflationary spiral, according to analysts and financial industry
> officials.
> "They'll be forced to do it if the economy continues this
> way," said an executive at a major Japanese financial institution.
> The move yesterday bolstered perceptions in the financial
> industry that the government has exhausted conventional means of
> boosting its economy, and is now headed into waters virtually
> unexplored for 50 years. In just two weeks, the idea of Japan's
> revving up the yen printing presses has moved from the realm of
> arcane academic discussion to the center of public policy debate.
> But the risks of such a policy, which some business leaders and
> many analysts view as likely sometime this year, are large.
> Some economists say if Japan aggressively expands its
> money supply, the yen will depreciate significantly. That could put
> pressure on other countries in Asia to devalue their currencies,
> sparking another round of global financial turmoil.
> The Bank of Japan, facing a major challenge to its
> independence, also could lose control of monetary policy to
> politicians who already have exhausted their own fiscal policy
> options. Indeed, a small but vocal group of politicians is urging the
> Bank of Japan to finance government spending directly by printing
> money. The last time the central bank tried that was to pay the
> military expense of the Second World War. The result was
> hyperinflation.
> "You don't want to write an open cheque, especially to the
> Liberal Democratic Party," said Ron Bevacqua, an economist at
> Merrill Lynch & Co., referring to this country's ruling political
> party.
> The Bank of Japan's Mr. Hayami has vowed the bank will
> "never" directly underwrite government spending, which is against
> the law. The policy board, its top policy-making group, last week
> rebuffed calls to buy more government bonds in the open market.
> Still, powerful economic and political forces have pushed
> what once were esoteric monetary arguments into mainstream
> debate. On one prime time television news show this week, the
> anchors donned placards labelling themselves "Bank of Japan" and
> "Government" and then passed around oversized copies of
> government bonds to explain a debate that raged last week in
> parliament.
> Driving the debate over monetary policy is a rise in interest
> rates since December. The yields on 10-year government bonds
> have tripled, in part because the government has been issuing large
> numbers of bonds to fund its economic stimulus programs.
> Interest rates of 2 per cent may seem low by global
> standards. But with wholesale prices falling, some economists
> worry that the real cost of borrowing has become high enough to
> threaten an economic recovery. Higher Japanese rates also have
> rattled the U.S. bond market, sparking fears Japan will lure capital
> away from the United States.
> All of which are powerful incentives for the Bank of Japan
> to act, but the trick may be finding a way to do so without
> appearing to cave in to political pressure.
> Already, the debate over expanding money supply has raged
> within the central bank for almost a year, central bank officials say
> privately. As the government launched one fiscal stimulus package
> after another, the central bank has slashed interest rates to break the
> deflationary spiral that has accompanied Japan's recession.
> With rates approaching zero, some members of the bank's
> top policy board began debating more radical approaches. One was
> expanding money supply rapidly with the aim of creating inflation.
> That might not only break the deflationary trend but also ease the
> burden of indebted banks, construction companies and the
> government, all of whom could pay back what they owe in cheaper
> yen.
> An academic paper by Massachusetts Institute of
> Technology professor Paul Krugman proposing this approach,
> heresy to central bankers who see their role as preventing inflation,
> was translated, circulated among bank staff last May and discussed
> at key meetings.
> While U.S. officials privately have urged Japan to use
> expansionary monetary policy to boost growth, Treasury Secretary
> Robert Rubin declined to offer the Japanese specific advice in
> public. But Mr. Rubin, speaking to reporters yesterday, praised
> Japanese efforts to stimulate their economy through government
> spending, implying that monetary loosening was the next logical
> way to generate the desired "domestic demand-led growth.''
> Mr. Rubin added that his support assumes Tokyo follows
> through on promised expenditures. "We think it's imperative that
> Japan get back on track," he said.
>
> Michael M Phillips in Washington contributed to this article.
--
Michael Perelman
Economics Department
California State University
Chico, CA 95929
Tel. 916-898-5321
E-Mail [EMAIL PROTECTED]
--------------8DB0761BFF68CC82D6EF5BC1
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Thu, 18 Feb 1999 15:19:47 -0800 (PST)
Date: Thu, 18 Feb 1999 15:37:02 -0800
To: [EMAIL PROTECTED]
From: Sid Shniad <[EMAIL PROTECTED]>
Subject: BANK OF JAPAN PUSHES SHORT-TERM RATES NEAR ZERO
The Globe and Mail Report on Business February 18, 1999
BANK OF JAPAN PUSHES SHORT-TERM RATES NEAR ZERO=20
Move bolsters perceptions the government in Tokyo has=20
exhausted conventional means of boosting its economy=20
=20
Bill Spindle, Jathon Sapsford=20
The Wall Street Journal, Tokyo=20
The Bank of Japan drove short-term interest rates to almost=20
zero yesterday, the most recent indication the bank has begun a=20
shift from conventional interest rate policy to focus on expanding=20
the country's money supply.=20
The move helped drive the yield on the benchmark=20
long-term bond down to 1.925 per cent from 1.985 per cent on=20
Tuesday. The yen also weakened on the news to more than 118 per=20
U.S. dollar, compared with 117 a day earlier.=20
The central bank's decision to push the interest rate it most=20
directly controls to 0.08 per cent from 0.15 per cent =97 and central=20
bank Governor Masaru Hayami's comments this week that even a=20
rate of zero would be acceptable =97 may be one of the first steps in=20
a policy shift toward more aggressively printing money to break a=20
deflationary spiral, according to analysts and financial industry=20
officials.=20
"They'll be forced to do it if the economy continues this=20
way," said an executive at a major Japanese financial institution.=20
The move yesterday bolstered perceptions in the financial=20
industry that the government has exhausted conventional means of=20
boosting its economy, and is now headed into waters virtually=20
unexplored for 50 years. In just two weeks, the idea of Japan's=20
revving up the yen printing presses has moved from the realm of=20
arcane academic discussion to the center of public policy debate.=20
But the risks of such a policy, which some business leaders and=20
many analysts view as likely sometime this year, are large.=20
Some economists say if Japan aggressively expands its=20
money supply, the yen will depreciate significantly. That could put=20
pressure on other countries in Asia to devalue their currencies,=20
sparking another round of global financial turmoil.=20
The Bank of Japan, facing a major challenge to its=20
independence, also could lose control of monetary policy to=20
politicians who already have exhausted their own fiscal policy=20
options. Indeed, a small but vocal group of politicians is urging the=20
Bank of Japan to finance government spending directly by printing=20
money. The last time the central bank tried that was to pay the=20
military expense of the Second World War. The result was=20
hyperinflation.=20
"You don't want to write an open cheque, especially to the=20
Liberal Democratic Party," said Ron Bevacqua, an economist at=20
Merrill Lynch & Co., referring to this country's ruling political=20
party.=20
The Bank of Japan's Mr. Hayami has vowed the bank will=20
"never" directly underwrite government spending, which is against=20
the law. The policy board, its top policy-making group, last week=20
rebuffed calls to buy more government bonds in the open market.=20
Still, powerful economic and political forces have pushed=20
what once were esoteric monetary arguments into mainstream=20
debate. On one prime time television news show this week, the=20
anchors donned placards labelling themselves "Bank of Japan" and=20
"Government" and then passed around oversized copies of=20
government bonds to explain a debate that raged last week in=20
parliament.=20
Driving the debate over monetary policy is a rise in interest=20
rates since December. The yields on 10-year government bonds=20
have tripled, in part because the government has been issuing large=20
numbers of bonds to fund its economic stimulus programs.=20
Interest rates of 2 per cent may seem low by global=20
standards. But with wholesale prices falling, some economists=20
worry that the real cost of borrowing has become high enough to=20
threaten an economic recovery. Higher Japanese rates also have=20
rattled the U.S. bond market, sparking fears Japan will lure capital=20
away from the United States.=20
All of which are powerful incentives for the Bank of Japan=20
to act, but the trick may be finding a way to do so without=20
appearing to cave in to political pressure.=20
Already, the debate over expanding money supply has raged=20
within the central bank for almost a year, central bank officials say=20
privately. As the government launched one fiscal stimulus package=20
after another, the central bank has slashed interest rates to break the=20
deflationary spiral that has accompanied Japan's recession.=20
With rates approaching zero, some members of the bank's=20
top policy board began debating more radical approaches. One was=20
expanding money supply rapidly with the aim of creating inflation.=20
That might not only break the deflationary trend but also ease the=20
burden of indebted banks, construction companies and the=20
government, all of whom could pay back what they owe in cheaper=20
yen.=20
An academic paper by Massachusetts Institute of=20
Technology professor Paul Krugman proposing this approach,=20
heresy to central bankers who see their role as preventing inflation,=20
was translated, circulated among bank staff last May and discussed=20
at key meetings.=20
While U.S. officials privately have urged Japan to use=20
expansionary monetary policy to boost growth, Treasury Secretary=20
Robert Rubin declined to offer the Japanese specific advice in=20
public. But Mr. Rubin, speaking to reporters yesterday, praised=20
Japanese efforts to stimulate their economy through government=20
spending, implying that monetary loosening was the next logical=20
way to generate the desired "domestic demand-led growth.''=20
Mr. Rubin added that his support assumes Tokyo follows=20
through on promised expenditures. "We think it's imperative that=20
Japan get back on track," he said.=20
=09
Michael M Phillips in Washington contributed to this article.=20
--------------8DB0761BFF68CC82D6EF5BC1--
