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2008年12月22日 (月)



--The Asahi Shimbun, Dec. 20(IHT/Asahi: December 22,2008)

EDITORIAL: BOJ rate cut reasonable


The Bank of Japan on Friday lowered its benchmark interest rate from 0.3 percent to 0.1 percent. This is a reasonable policy decision given the current economic situation.


The BOJ's latest Tankan quarterly business confidence survey indicated economic conditions are deteriorating faster than at any time since the first oil crisis.


Moreover, the U.S. Federal Reserve has recently cut its target interest rate to virtually zero and turned to an unconventional approach known as "quantitative easing."


The Fed's move, which pushed down interest rates in the United States below those in Japan, increased the risk that the dollar, already trading below 90 yen, could drop further against the yen.


The BOJ's rate cut is unlikely to be a very effective solution to the problem of the yen's unwanted strength. What is happening now is more the weakening of the dollar than the strengthening of the yen.


If speculative sales of the dollar grow uncontrolled to an alarming level, the Japanese government should step into the currency market together with the U.S. and other major economies in a concerted and determined attempt to rein in such speculation.


The BOJ was cautious about a further rate cut because of the fear that lowering the target rate for overnight lending to near zero would hinder the money market from functioning properly.


The central bank's concern probably explains why it reduced the rate to 0.1 percent instead of down to zero. Now, the BOJ's policy priority should be on supporting the credit markets where companies raise funds.


To do so, the BOJ has launched a new, temporary program to buy commercial paper, a critical short-term debt instrument for businesses.


The bank has also suggested it may expand this program to cover a broader range of financial instruments used for corporate financing.


In a way, the BOJ has embarked on de-facto quantitative easing while keeping the interest rate above zero.


We applaud this decision, which represents a bold departure from the BOJ's previous refusal to go beyond accepting commercial paper as collateral for lending to commercial banks.


It is extremely unusual for the central bank, whose primary mission is to keep the value of the nation's currency stable, to buy debt instruments like commercial paper, a step that exposes the bank to the risk of corporate bankruptcies. Not surprisingly, the BOJ characterized the program as a temporary measure in response to the serious economic crisis.


Should the corporate issuers of commercial paper and other debt securities bought by the BOJ actually go under, however, the central bank's balance sheet would be damaged. The kind of risk the BOJ is now taking on became reality when Yamaichi Securities Co. collapsed in 1997 after receiving emergency relief loans from the central bank.


Back then, the BOJ prevented damage to its balance sheet by reducing the money it paid into state coffers from its profits by the amount of the soured loans to Yamaichi.


The BOJ's plan to buy commercial paper and other debt securities will not produce the expected effects without government cooperation. The government should create a scheme to cover the losses the BOJ suffers from defaults with public funds to preserve confidence in the central bank.


At the same time, confidence in the BOJ's independence is also a crucial foundation for effective policy efforts.


Some Cabinet members had made remarks apparently intended to put pressure on the BOJ to cut the rate. But the government would be better advised to avoid any act that could undermine the BOJ's independence.


The central banks of Japan and the United States have started moving toward employing all policy tools available to deal with the economic downturn. They have apparently no other choice if they are to make effective policy responses to the ongoing crisis.


That, however, doesn't change the fact that they are taking drastic, potentially risky steps that will plant seeds of excessive liquidity, which could lead to inflation or another financial bubble in the future.


The monetary authorities have a duty to map out a viable exit strategy for this unprecedented monetary expansion.



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