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EDITIONS
Monday, 19 March, 2001, 18:37 GMT
Japan cuts rates to zero
Yoshiro Mori
Mr Mori meets President Bush on Monday
The Bank of Japan has brought back its zero per cent interest rate policy, in an effort to boost the country's ailing economy.

And it has guaranteed to keep the ailing banking sector afloat by flooding the economy with money if a major bank was threatened with bankruptcy.


Should there be a risk of financial market instability..the Bank will provide ample liquidity irrespective of the guidelines

Bank of Japan
The Bank says it will maintain its zero interest rate policy as long as consumer prices in Japan continue to decline. Such deflation makes consumers reluctant to spend money, and thus increases the severity of the recession.

Financial analysts are doubtful, though, whether the new policy will help the economy. With rates already close to zero, the move is more of symbolic than economic value.

Government pressure

The bank had been under intense pressure from the government to cut its rates, which already are as low as 0.15%.

Governor Masaru Hayami
Mr Hayami was against the rate cut
The bank's governor, Masaru Hayami, had been reluctant to change monetary policy, blaming the weakness of the economy not on interest rates but the huge debt burden crippling Japan's banking industry.

Later on Monday, Prime Minister Yoshiro Mori will meet President George W Bush in Washington, with economic policy high on the agenda.

There are fears that the problems in Japan could drag down the US economy, which already is suffering a nasty slowdown.

Yoshiro Mori
Mr Mori expects the Bank of Japan to do the right thing
Mr Mori said the summit was a key chance for the two allies to confirm economic policies and cooperation at a critical time.

Mr Mori, who has escaped several no-confidence votes in parliament, said he expected the Bank of Japan to do the right thing on monetary policy.

"Japan's economy is showing signs of stalling and the American economic slowdown has become clear. At such a time it is extremely important to confirm our economic policies and management at the leaders' level," Mr Mori said.

Mr Mori and President Bush are expected to issue a joint statement pledging cooperation on macroeconomic policy.

Little impact

But with interest rates already nearly down to zero, the change in policy is expected to do little to stimulate the economy.

Vincent Musumeci of ABN Amro bank said stock markets would be relieved, but cautioned that it was "very unclear what the effectiveness of this type of policy will be on the underlying real economy".

He added that the effectiveness of the mechanism through which monetary policy can change economic realities in Japan was "quite compromised".

Other economists voiced similar concerns, but Yoshihisa Okamoto at Fuji Investment Management predicted that the stock market would "bounce on this, especially banks and low-priced issues".

Zero rates

The Japanese central bank controversially abandoned zero interest rates last August, despite fierce opposition from politicians.

Since then, the central bank has cut interest rates twice - the overnight rate to 0.15% and the largely symbolic discount rate to 0.25%.

The Bank of Japan governor Masaru Hayami is chairing Monday's meeting to decide on further cuts.

A slew of bad economic news has softened the stance of Mr Hayami since the summer.

"Although Hayami had strongly ruled out the possibility of returning to the zero-rate policy until recently, he has changed his mind," said JP Morgan chief economist Masaaki Kanno.

Last week the government admitted in a monthly report that the economy had stalled and was vulnerable to deflationary pressures.

Falling prices are hurting companies, forcing them to make cutbacks.

This in turn could further discourage Japan's weary consumers from spending - an important stimulus for the ailing economy.

Who's in charge

The bank's decision was complicated by worries over whether a change in policy could compromise the bank's reputation for independence.

The Bank of Japan allows politicians to attend policy meetings and submit motions, but does not give them any voting rights.

Japan's stock market continued its slide on Monday, with the Nikkei index of leading shares closing down 0.34% at 12,190, a 42 points fall.

 WATCH/LISTEN
 ON THIS STORY
The BBC's Charles Scanlon, in Tokyo
"The Bank of Japan and the government are begining to take the country's problems seriously"
See also:

19 Mar 01 | Business
19 Mar 01 | Business
18 Mar 01 | Business
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08 Mar 01 | Business
06 Mar 01 | Business
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