PKT message, BOJ poised to use free money

From:	"Victor Bridger" <socred@xxxxxxxxxx>
To:	"William B Ryan" <william_b_ryan@xxxxxxxx>
Subject:	Fw: The Age BoJ poised to use free money.htm
Date:	Wed, 21 Mar 2001 11:47:33 +1000

Hi Bill,

In case you did not see this I thought you may be interested. The reasons for this action are not so important as the fact that it demonstrates that it can be done. Douglas has been proved correct again. An injection of new money into an economy as suggested by Douglas for the purposes of "filling the gap" between prices and purchasing power can be done. If it can be done for one reason, it can be done for another. The difference is that Douglas' ideas were a positive approach which would not be inflationary and would see a reduction in prices, and not a defensive one as suggested here "using inflation to push up prices". In addition their idea is to "stimulate economic activity" which is not the purpose of the National Dividend or Compensated Price adjustment.

One comment that is interesting is that relating to the time when the BoJ abandoned their 18-month 'experiment'. The suggestion that "the abnormal policy was distorting economic activity and enabling inefficient, debt-laden companies to remain alive...", is quite astounding. I would have thought that Companies would only survive is there were sufficient sales of their products. The fact that they were debt-laden has no co-relation with their efficiency in terms of producing and selling. They may be inefficient in their operations and it is possible that without debt thay may have folded, but the fact that they had debt would add to their problems. The point is that any business no matter how efficient or inefficient operating on funds (which could their own savings) free or otherwise, will not survive unless there is a market willing to purchase.

So much for monetary policy to solve problems. What happens after zero? Do they start to pay people to borrow?

Vic

BoJ poised to use free money

By MICHAEL MILLETT
TOKYO
Tuesday 20 March 2001

Japan is poised to resume its controversial use of free money and embrace even more radical policies in a desperate attempt to revive its moribund economy.

Japan's central bank, the Bank of Japan, has signalled its preparedness to shift direction following evidence that the country's recovery is being threatened by deflation, a shaky financial system and a slowdown in the United States.

The bank's board held a marathon meeting yesterday to consider a return to zero interest rates and the introduction of quantitative easing measures.

These are designed to pump more money into the banking system - essentially using inflation to push up prices.

Because of the deflationary drift, Japanese consumers will not spend. Public and private sector debt is climbing.

The BoJ abandoned Japan's 18-month "experiment" with zero-interest rates last August, claiming the abnormal policy was distorting economic activity and enabling inefficient, debt-laden companies to remain alive through a guaranteed supply of free funds. It was then the world's longest running exercise in zero rates.

But the bank has been under sustained pressure from the Japanese Government to reverse direction. Last month, it cut the overnight call rate back to 0.15 per cent from 0.25 per cent. At these minuscule rates, another cut is symbolic only.

The market is more interested in the bank's willingness to use monetary targeting - raising the quantity of money in circulation rather than its price - to stimulate economic activity.

While the BoJ mulled its decision, currency traders made some of their own, sending the yen to a 22-month low.

The Japanese currency fell for a fourth day, by as much as 0.5 per cent to 123.50 to the US dollar, its lowest level since May 1999. It was recently at 123.21. Against the euro, it held at 110.38.

"The yen may fall further once the BoJ actually returns to the zero-rate policy," said Satoshi Tate, a vice-president for foreign exchange at Sanwa Bank. "Japan's economy won't turn around no matter what the BoJ does, so the yen could plunge to 127 per US dollar some time this week."

The currency's decline, though, was curbed after Haruhiko Kuroda, Japan's currency chief at the Ministry of Finance, said, "there's no such thing" as a planned agreement to weaken the yen.

The yen may also gain support from expectations the nation's exporters will take advantage of the US dollar's ascent by 5 per cent since the beginning of this month to repatriate overseas earnings and convert the proceeds back into their home currency, traders said.

-with BLOOMBERG