Asia Times: ANALYSIS: Covert Hayami-Greenspan operations?



	August 17, 1999	atimes.com

Japan

ANALYSIS: Covert Hayami-Greenspan operations?
By Uwe Parpart
Editor, Asia Times Online

Unsurprisingly, the Bank of Japan's policy board left monetary policy unchanged at its Friday meeting. And not only that: already on Thursday it had trotted out the director of the BOJ's Institute for Monetary and Economic Studies Kunio Okina to argue in an opinion piece in the Financial Times that additional easing of monetary policy is not a realistic option. (The piece is a precis of a more detailed analysis published by the IMES on July 28 under the title, ''Monetary Policy Under Zero Inflation - A Response to Criticisms and Questions Regarding Monetary Policy'', which can be found on the BOJ website - http://www.boj.or.jp/en/ronbun/ronbun_f.htm [document 99-E-20]).

Okina's points border on the trivial, to put it politely. For example, targeting a specific level of inflation and making base money an operational target is not a viable solution, he writes. The bank ''might seek to raise inflation from the current level of zero to, say, 2%'' but cannot do so by lowering interest rates ''since short-term interest rates are already at zero''. And further, ''there is no simple way to ease monetary policy when the economy is caught in a liquidity trap''.

Few forex dealers or more astute analysts are impressed by such impeccable logic and have instead chosen to carefully watch the movement of the BOJ's hands and feet (or money, as it were) rather than putting their trust in officials' pronouncements. The Nihon Keizai Shimbun, Japan's largest business daily, reports that a poll of investors shows that 54 percent of respondents believe that Japanese monetary authorities have changed their policy stance (27 percent also believe that the U.S. Treasury has begun to switch from its earlier policy of maintaining a strong dollar).

There is growing suspicion that, though announced Japanese interventions in the currency market have been less frequent since Haruhiko Kuroda replaced Eisuke Sakakibara as the Finance Ministry's vice-minister for international affairs, there have been ''covert'' purchases of dollars and dollar-denominated assets. That foreign government holdings of U.S. Treasury securities deposited with the Federal Reserve Bank of New York increased by more than $4.2 billion in the week through August 4 and that the outstanding balance hit a high for the year of $608.4 billion are cited as evidence. There is evidence as well, say Tokyo dealers, that the BOJ has become somewhat lax in sterilizing its yen sales, BOJ Governor Masaru Hayami's statements that the bank was ''not thinking of turning intervention into a tool of monetary policy'' notwithstanding.

Some form of concerted action by the U.S. Fed and Treasury on one hand and the BOJ and MOF on the other to stem the weakening of the dollar would make sense. There is growing concern in the U.S. government over the prospect of dollar funds moving offshore in sizeable amounts and negative effects on the U.S. bond market where the spread between government and private-sector interest rates has been steadily expanding. And there is, in turn, concern in Japan that stocks will continue to fall from their mid-July peak on the stronger yen.

Under these circumstances, we believe that in addition to his stated inflation worries, Fed chairman Alan Greenspan may also want to slightly further tighten U.S. monetary policy on August 24 on fund-flow worries. And Japan will need to find ways and means to ease further to counteract the impact on long-term rates as another supplementary budget (and additional deficit bond issuance) are enacted in September. The BOJ's Okina theorizing will be overcome and overturned by the demands of more pressing realities.

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