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JULY 21, 2000 VOL. 26 NO. 28 | SEARCH ASIAWEEK Business Buzz Should ZIRP Be Zapped? By CESAR BACANI Hold it. Don't exhale yet. Sure, Alan Greenspan and the Fed kept U.S. interest rates steady in June. And they may not move aggressively at the next meeting in August either if the American economy makes a soft landing, as the latest numbers seem to indicate. On July 17, though, the Bank of Japan (BOJ) will hold its own rate-setting meeting, and key officials have been dropping hints about the desirability of raising interest rates. Asia is worried. If an even slightly higher cost of borrowing stalls Japan's very tentative recovery, growth in the region could easily get derailed. Of course Japanese rates have nowhere to go but up. The BOJ adopted a zero-interest-rate policy -- ZIRP to you -- in February 1999. The central bank engineered a zero rate in the short-term money market and lowered its official discount rate to 0.5%, meaning corporate and individual borrowers still have to pay some interest on loans. ZIRP was an emergency measure to help stimulate corporate and consumer spending. But after 17 months, there are signs that private demand is improving. The uptrend, says deputy BOJ governor Fujiwara Sakuya, is fueling talk within the central bank for an end to ZIRP. The worry is that Japan is getting too comfortable with the easy-money regime. Even the most inefficient enterprises can thrive, sapping resources from sectors that deserve more support. Japan's Nervous Nellies warn that another financial bubble is forming as investors bet that ZIRP will remain in place. On the other hand, ZIRP supporters argue that the recovery is still too fragile. Higher interest rates will cut corporate earnings, affect investment plans and stunt employment growth. And how on earth can the government afford to issue bonds to fund another stimulus package if it has to pay higher rates on them? BOJ Governor Hayami Masaru and two deputies are said to lean toward ending ZIRP. Officials from the Ministry of Finance, which used to oversee the central bank (the BOJ is now an independent body), urge the status quo. So does U.S. Treasury Secretary Larry Summers, who said last week that "priority has to be attached to sustained domestic demand-led growth" in Japan. Translation: Don't zap ZIRP yet. What will the BOJ do? Keep holding your breath. Write to Asiaweek at mail@web.asiaweek.com
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