Asia Times: BOJ must not lift zero interest rate policy


	May 24, 2000	atimes.com

Editorials

BOJ must not lift zero interest rate policy

Japan's Ministry of International Trade and Industry said on Monday that its all-industry activity index jumped 3.2 percent in the January-March period from the same period last year, rose 0.3 percent from the previous quarter, and for March alone showed a 2 percent increase in activity from February. Such data, marking the fifth straight quarter of activity increases in key industrial sectors, tend to confirm the forecasts of those who expect that first quarter GDP figures to be released on June 12 will show that the economy grew by an annualized 8-10 percent (by some estimates by as much as 13 percent) in that period.

Along with other encouraging signs noted in the Bank of Japan's monthly economic report released May 19 - notably corporate earnings and capital spending - the data also appear to be prompting BOJ Governor Masaru Hayami and other members of the central bank's monetary policy board to give serious consideration to lifting the zero interest rate policy in place since February 1999. Hayami said as much in his May 19 press conference following the release of the BOJ monthly report, noting that concerns over deflation - the principal official motivation for the zero rate policy - had largely been put to rest. Moreover, minutes of the April 10 BOJ policy board meeting released on May 22, show that there was a ''livelier debate'' on current monetary policy than in some time, with the timing of a rate hike a key element in the discussion.

Such discussion is well-advised as the bank must give careful consideration to the impact of an eventual rate rise on financial markets. But termination of the zero interest policy in the relative near term would be ill-advised in the extreme and could undermine recovery just as it is ever so slowly taking root. The central facts of the recovery as witnessed to date remain that economic activity has picked up on the basis of public spending and external demand, ie, is deficit-spending and export-led. Corporate earnings have tended to improve mainly as a result of corporate down-sizing, including job and salary cuts, and capital spending (except for domestic IT investment) has grown largely in reponse to gearing up of and for exports. What has not happened so far is substantial expansion of private domestic demand.

As a result, domestic credit expansion has remained in the doldrums. For domestic private demand to pick up, the essential precondition is the creation of new businesses and with that creation of new and higher-paying jobs. And that, alas, is what's lacking at present, AND WERE THE BOJ TO RAISE RATES IN THE NEAR FUTURE, WHAT LITTLE NEW BUSINESS ACTIVITY THERE IS WOULD BE KILLED BY HIGHER COST OF FUNDS. So, Hayami-san, don't do it!

The Japanese central bank governor has impressed us in the past with his astute refusal to give in to political demands by the governing parties for further monetary easing as an alternative to restructuring and business deregulation. We haven't heard much of that from him in recent months except for obligatory footnotes. Has he conceded that in-depth deregulation of the economy is politically unfeasible and concluded that raising interest rates might be an indirect way of forcing the issue? If so, it's decidedly the wrong tack. The very few signs of self-sustaining recovery, meaning recovery unaided by public spending and external demand, would likely disappear with a premature rate hike, and the principal job of getting pork-barrel politicians to forego their favorite sport and get serious about deregulation would remain undone.

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