VIEW FROM TOKYO: BoJ has no more goodies to dispense

The prime aim of the latest cut in rates appears to be cosmetic

The Finance Minister, Masa- yoshi Takemura, called it "the boldest action taken by financial authorities in the post-war era", and, on the face of it, it was hard to disagree. On Friday, Mr Takemura's colleagues at the Bank of Japan came within a whisker of granting a financier's fantasy: free money.

With immediate effect, the BoJ's official discount rate - the interest the central bank charges to commercial banks - was halved, from its already record-breaking level to 0.5 per cent. It is the first time a leading economy has enjoyed a key interest rate of less than 1 per cent.

The markets celebrated with a 3.7 per cent leap on the Nikkei 225 Average, and to everyone's relief the yen sank again, briefly crossing the Y100 level against the dollar for the first time in eight months.

The cut is intended to rejuvenate the Japanese economy by easing the grave interlocking pressures that have threatened all year to flare up into full grown crises. The most obvious of these is the chronic level of bad debt among Japan's banks put at between Y50,000bn (pounds 324bn) and Y80,000bn.

Five small or medium-sized Japanese lending institutions have gone under since December, two of them in the past fortnight. By virtually giving away money to the banks, the BoJ allows the survivors to increase their profits and liquidate the bad loans before they too are sucked under.

The broader aim is to stimulate the stalled economy by increasing the flow of money, and to inhibit the alarmingly deflationary pattern into which Jap- an threatens to become locked. The strong yen and weak dollar have encouraged cheap foreign imports which, combined with sluggish demand and excess production capacity, have driven down the prices of domestic products. The great fear is that these will seriously start to affect corporate profits, thus reducing employee pay, forcing redundancies, and further reducing customer spending in an implosive deflationary spiral. By making money cheaper, the thinking goes, spending will be stimulated and the slow journey to growth can begin again.

There is little reason to believe that Friday's move will succeed in reinvigorating the eco- nomy: since 1991, the BoJ has cut the discount rate nine times, most recently in April. Apart from the boost to short-term morale, the positive results have been hard to discern.

The problem is that the two aims - easing bad debts and improving money supply - are in some ways contradictory. The discount rate is a present given only to the banks: for its benefits to trickle down to the economy at large it is necessary for lenders to reduce in turn the rates they charge commercial borrowers. But with a mountain of bad debts to clear from their own books, there is little incentive for banks to do this.

In any case, a shortage of reasonable loans is not the problem facing Japanese industry. The truth is that they have nothing to spend the money on. Among manufacturers, the biggest headache at the moment is over-capacity and over-employment: in the car industry, rapid expansion during the boom days of the 1980s has created idle factories and surplus employees now that the spending frenzy has fizzled out. Manufacturers estimate increased sales of 1.6 per cent in the next 12 months, while the service industry anticipates a 1.6 per cent fall.

The central bank has backed itself into a corner. Short of literally giving money away or paying banks to take it off its hands, it has no more goodies to disburse. The markets know this, and will react accordingly, next time crisis looms. Why has the BoJ chosen to use up its fiscal ammunition when it had so little effect in the past?

The answer, according to one theory, is that it has a lot to do with the US, and the quiet but powerful programme of economic intervention co-ordinated by Tokyo and Washington over the summer. Japan depends on US dollar-buying to reduce the yen from the levels that were strangling its export industry earlier this year.

Alan Greenspan, chairman of the Federal Reserve Board, has repeatedly asked for lower Japanese interest rates to encourage a flow of yen to America, and allow the Clinton administration to make its own cut in advance of the presidential election.

But, depressingly, the cut's principle aim seems to have been cosmetic, and in this it succeeded wonderfully. Just hours after the BoJ's publicity machine unveiled the historic cut, its research and statistics department made a far grimmer announcement in the form of the "Tankan", a quarterly survey of corporate sentiment and the most authoritative indicator of Japan's short-term economic prospects. In recent years the survey's complicated register of graphs and tables have expressed steadily lessening degrees of depression. But this week, for the first time in 22 months, pessimism among the 9,000 companies surveyed had increased. The Tankan's gloom graphs tend to coincide neatly with periods of recession and on any ordinary day the figures would have sent shivers through the markets. But the bad news was pre-empted by the BoJ's magic cut, and the Tankan's evil spell was warded off, for another three months at least.

Richard Lloyd Parry

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