Asia Times: EDITORIAL: This zero won't fly



	May 25, 1999	atimes.com

Japan Economy

EDITORIAL: This zero won't fly

Unlike Japan's fabled World War II fighter plane, the Bank of Japan'sinterest zero is hardly a roaring success.

It's been three months now since the BOJ's policy board decided at itsFebruary 12 meeting to guide short-term interest rates to near zeropercent. This policy decision, sustained in every meeting since then, hascalmed the bond market and brought the yield on the benchmark 10-yeargovernment down from over 2 percent to the 1.3 percent range. With that,fears that issuance of some 37 trillion yen in new bonds this fiscal yearto finance deficit spending would sink the bond market and deliver anotherbody blow to the economy have subsided. But beyond that, no significantpositive effect on overall economic activity has become discernible todate.

With very low short-term rates, cash-rich investors are going forlonger-term investments, and with low yields on government debtinstruments, higher-risk corporate bonds are proving attractive. SeveralJapanese companies that found themselves unable to issue longer-term bondsas late as early this year have recently done so and with outstandingsuccess.

But the trouble is that too few companies are willing to take advantage ofthe current very favorable climate for bond issuance. Plagued by piles ofold debt, by overcapacity and overemployment, they see no need orsignificant opportunities for new investment and hence no need for raisingfunds.

In April, outstanding commercial paper issues were some 2.7 trillion yenless than at their peak in December 1998, and financial institutions'outstanding loans showed a record year-on-year decline.

Perhaps April figures are too early an indicator; perhaps the zero-interstpolicy must be given more time to show its worth. Few if any countries haveever experimented with such super-low rates and there are no experimentalresults to fall back on and make a decisive judgement.

In favor of the policy, given some of the indications of much easierfund-raising by less than prime companies, it might be argued that a usefuljunk-bond market might be developing, allowing for better access to capitalby start-up firms and innovative enterprises previously judged too risky bythe market. This would be precisely what Japan needs and is likely to be aheartening, albeit probably unintended, consequence of the BOJ policy.

But will that be enough to kick-start the economy overall?

We seriously doubt it. The BOJ pointed out in a recent policy researchpaper that the consumer price index calculated by the Administrative andManagement Agency likely overstates pricedevelopments significantly since, in particular, it does not take into account muchhigher value for the money spent in the rapidly growing IT field. We fullyagree with the BOJ's point and hence it must be concluded that thedeflationary tendencies in the economy are even more severe than officialfigures show.

Having decided (after a lot of hemming and hawing) to embrace the zeroshort-term interest rate policy, the BOJ might thus be well-advised to takethe next experimental step and endorse (sooner rather than later) thepersistent proposal of policy board member Nakahara for quantitative easing,targeting money supply and a specific inflation rate in the 1 - 2 percentrange.

We would regard such a policy shift toward further aggressive monetaryeasing as being eminently preferable to the suggestion on Tuesday by IMF ManagingDirector Camdessus that by autumn Japan will need another round ofpump-priming measures to enhance consumer spending and investment. We would feel that way even if of the economy rather than wasted on highways and bridges to nowhere.

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