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2008年12月19日 (金)



--The Asahi Shimbun, Dec. 18(IHT/Asahi: December 19,2008)

EDITORIAL: Fed's zero rate policy


To prevent his worst nightmare from becoming reality, U.S. Federal Reserve Board Chairman Ben Bernanke has made a gutsy decision. His biggest fear is that a deflationary downturn in the U.S. economy will throw the world economy into an abyss.


If the U.S. economy falls into a full-blown deflationary spiral, finance and credit will contract rapidly, forcing businesses to sharply reduce their production and work forces. The downward pressure could become so strong that both monetary and fiscal policies would be powerless to turn the tide.


If that happens, the entire world would be sucked into a deflationary maelstrom.


What the Fed announced Tuesday was the so-called zero interest rate policy. For the first time in the history of U.S. monetary policy, the central bank lowered its target range for the federal funds rate to between zero and 0.25 percent. Since interest rates cannot fall below zero, there is no room for further monetary easing through the traditional approach of interest rate cuts.


So Bernanke also decided to take bold steps to inject money directly into the economy through the unconventional approach known as quantitative monetary easing policy. That means the Fed will buy huge amounts of bonds of various kinds and mortgage-backed securities to help businesses raise the money necessary for maintaining operations and restore stability in the financial system.


By buying long-term Treasury securities, the Fed is also trying to push down long-term interest rates and lift the economy.


The Bank of Japan adopted the quantitative easing approach to fight deflation between 2001 and 2006. At that time, the BOJ flooded the banking system with liquidity and urged commercial banks to expand lending to companies. That made sense because in Japan domestic companies depended on bank loans for much of their financing.


In the United States, in contrast, companies raise most of the funds they need in securities markets. The Fed's quantitative easing operations are designed to support corporate financing directly by buying bonds and commercial paper, a kind of unsecured promissory note for short-term financing, issued by companies.


It effectively means the Fed lends money directly to companies. By using this unusual policy tool, the central bank is running the risk of allowing its balance sheet to be damaged by possible defaults on the bonds and commercial paper it is buying. In such cases, the U.S. government will cover the losses with public funds.


If losses from the operations balloon to an amount that puts a serious strain on public finances, however, confidence in both the U.S. government and central bank could diminish, triggering a crash of the dollar. Even so, the Fed has no choice but to use all available tools to defuse the impending deflationary crisis, which is threatening to send the economy into a downward spin.


Apparently, U.S. monetary policy has reached a make-or-break juncture.


All major central banks are now facing similar policy challenges. The European Central Bank has reduced its target interest rate to 2.5 percent through a series of cuts, while the Bank of England has lowered the key rate down to 2.0 percent, the lowest level since the British central bank was founded in the late 17th century. Yet both central banks are almost certain to be forced to cut interest rates further.


The Bank of Japan cut its benchmark interest rate by 0.2 percentage point to 0.3 percent in October and has since taken additional steps to pour money into markets. But the BOJ has so far refused to go beyond accepting commercial paper and corporate bonds as collateral for loans to banks.


Since domestic companies are finding it harder to raise the funds they need to stay in business, the BOJ should be open to the policy option of buying corporate bonds and commercial paper directly from companies. The BOJ needs to cooperate with the government in guarding itself against possible defaults as the Fed is doing.


With the central bank's policy board meeting under way, BOJ Governor Masaaki Shirakawa must make his own gutsy decision.



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