Asia Times: EDITORIAL: BOJ takes easy way out



	February 17, 1999	atimes.com

Japan Economy

EDITORIAL: BOJ takes easy way out - into deeper trouble

In what was easily its most widely watched meeting in recent history, the Bank of Japan's (BOJ) policy board voted Friday to lower the target for the unsecured overnight call money rate to about 0.15% from the current 0.25% average.

But that's not why people had been watching or what markets had been watching for. The further easing of monetary policy is welcome; but the real issue was whether the bank would agree to direct purchases of Japanese government bonds (JGBs) from the Finance Ministry (ie printing money) or at least significantly stepped-up bond purchases in the secondary market.

On those two matters the bank stuck to its previous ''nays'', strong pressure from leading figures of the LDP/LP coalition government notwithstanding. It appears that at the moment BOJ Governor Masaru Hayami and the policy board are more concerned to defend the bank's only recently won (April 1, 1998 new BOJ law) independence from political interference than they are over the fate and direction of the economy.

On that, we strongly believe, Hayami-san is dead wrong - not, of course, on guarding central bank independence, but in his economic policy judgement. The pumping of substantial amounts of public funds into the economy had, according to the Economic Planning Agency (EPA), produced some minor upticks in economic indicators in the fourth quarter of 1998, but by no means anything definitive. ''Maybe the economy hit bottom in the fourth quarter,'' joked a Ministry of Finace bureaucrat, ''and maybe - like the Titanic - it will never come up again."

The greatest current threat to achieving sustainable if modest economic recovery this year is the threat of much higher long-term interest rates resulting from the government's planned Y31.7 trillion in new bond issuance in fiscal 1999. The BOJ has very little monetary-policy leeway left to counteract that; nor will further pump-priming do the trick. Substantial BOJ bond purchases are by far the most promising policy option - and for once, some leading politicians' saying so doesn't make it wrong.

For several weeks now, U.S. Treasury officials have been putting unprecedented pressure on Japan to adopt the BOJ bond-buying strategy as well as forcing much larger public funds down reluctant banks' throats than the Y7 trillion now targeted. That bespeaks real and deep U.S. policy concern: When have you last heard U.S. officialdom calling upon Japan to adopt measures that will lower the value of the yen to the greenback, and especially at a time when the U.S. trade deficit with Japan has been growing rapidly?

We are certain that there is no hidden U.S. agenda in the call for Japanese reflation and aggressive banking system rehabilitation. The concern is simple: On one hand, for Asia to recover, Japan must recover, and very soon. On the other hand, another Japanese blow-out could decidedly throw the world economy into a debilitating tailspin.

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