Cash floodgates set to open

By Michael Millett, Herald Correspondent in Tokyo

The Bank of Japan is preparing to flood the world's second-biggest economy with free cash as part of a desperate campaign by international policymakers to shore up confidence in the global financial system.

The Japanese central bank is under immense pressure to emulate its European and United States counterparts by easing monetary policy to stimulate business activity.

But credit rates in Japan are already at unprecedented, near-zero levels and have been for most of the past three years. This means the bank board, which was meeting late yesterday to consider an emergency policy package, has little room to manoeuvre.

Cutting interest rates has had virtually no effect on business activity. The bank's only real option is to pump even more liquidity into the nation's moribund financial system in the hope that it will respond.

Financial experts say this is pushing the independent central bank even further into financially uncharted waters.

While the traditional role of central banks is to fight price rises, the Bank of Japan is engaged in precisely the opposite strategy. Because of Japan's deflationary spiral, the bank's only recourse is to swamp the economy with cash, reversing the price direction or at least stabilising it.

The bank's governor, Mr Masaru Hayami, has vigorously rejected political pressure to formalise this process by adopting an inflation target.

However, he has grudgingly resolved to keep the taps open until the consumer price index stabilises at zero.

According to government figures, prices are falling by about 1 per cent a year. But critics say this understates the extent of Japan's deflationary problem.

While consumers have welcomed the crumbling of Japan's notoriously high price structure, deflation saps business confidence, induces people to defer purchases and forces up the real value of debt.

The Bank of Japan trimmed its traditional two-day board meeting to one yesterday, acknowledging the international pressure on it to contribute to an international policy response to counter the economic repercussions of last week's attacks in the United States. But Mr Hayami is again expected to fall short of demands that he set an inflation target of 1 to 2 per cent.

http://www.smh.com.au/news/0109/19/world/world18.html

-- Martin Thompson (mthom1927@aol.com), September 18, 2001