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Monday, 19 March, 2001, 15:15 GMT
Japan's zero rate battle
Bank of Japan Governor Masaru Hayami
Bank of Japan reinstates zero interest rates, after abandoning the policy, as the economy threatens to relapse into crisis
By the BBC's Rodney Smith in Tokyo

A struggle for economic and financial supremacy has been raging in Japan between the powerful but fundamentally old-guard Ministry of Finance and the new-economy thinkers at the Bank of Japan.

Modern Japanese politics is all about consensus, but since Masaru Hayami took over as governor three years ago, just after the Bank of Japan effectively gained independence in decision-making, it has fought its corner with a new commitment and enthusiasm.

Mr Hayami, who is a devout Christian, was quoted shortly after taking over at the bank: "In front of God, we are supposed to be fully accountable for what we have done on earth."

He is also a former business man who lost a great deal of money during the bubble economy of a decade ago.

That experience turned him from enthusiastic borrower to monetarist hawk - conscious that the only way to gain credibility beyond the influence of Yoshiro Mori's all-powerful and ruling Liberal Democratic Party (LDP) was for the Bank of Japan to develop its own track record for integrity.

Japanese Finance Minister Kiichi Miyazawa
Kiichi Miyazaw, Finance Minister, ponders zero interest rate policy returns, in attempt to turn around the lagging economy

Thus this week's decision on monetary policy, which allows Mr Hayami and the BoJ to come out on top, and Mr Miyazawa's Ministry of Finance not to lose - face saved all around.

Opposition from the LDP was huge when the BoJ abandoned the so-called ZIRP (zero interest rate policy) in August last year, and it has been fomenting along quietly ever since.

But the bank's view was that the ZIRP had been a sop to the LDP, the party of big business - much of the big business, construction companies up their necks in debt to the banks.

But when the return to real-money interest rates was made, and the economy began to slow, the LDP blamed the BoJ for starving a fledgling recovery.

Now the BoJ has come up with a very Japanese compromise.

It could, just could, turn out to be a brave move that will get the Japanese economy off its back.

It should increase the amount of money in circulation while bringing rates down. But, to work effectively it will have to stimulate the Japanese man and woman in the street to dig into his or her savings.

Curiously, it just might do that if the overall effect is what many economists believe it could be - it could stimulate inflation - especially if the yen eases as well - and that above all else is likely to persuade Mr and Mrs Okura to see that their savings are at risk if they keep them in the savings bank.

Then they might spend. That is what Mr Hayami is counting on.

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