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SEPTEMBER 1 , 2000 VOL. 26 NO. 34 | SEARCH ASIAWEEK

Business Buzz
Goodby ZIRP. Hello N-ZIRP

By CESAR BACANI

You can exhale now. In July, everyone held their breath as the Bank of Japan met to consider junking its 18-month-old zero interest-rate policy (ZIRP). Politicians and bureaucrats in Tokyo, and even U.S. Treasury Secretary Larry Summers, argued that Japan's economic recovery was too fragile to endure a rate hike. The central bankers listened and held the line. But barely a month later, on Aug. 11, they zapped ZIRP by raising the overnight rate from near zero to 0.25%. Defying the government, the Bank of Japan proved it is an independent body in the mould of the U.S. Federal Reserve.

So far, the stock and currency markets are taking the rise in stride. The fear was that higher interest rates will eat into corporate earnings, slash investment spending and lead to job losses. Because of higher yields, the yen was supposed to strengthen, which could then price Japanese exports out of world markets and deprive the economy of one of its few bright spots. So far that hasn't happened and might not. The increase, after all, is only a minuscule 0.25%.

New numbers released last week suggest that Japan's economy is more robust than many thought. The all-industries production index rose 1.8% in April-to-June compared with the preceding three months. It was the sixth consecutive quarter of growth. The performance exceeded expectations and raised hopes that GDP growth in April-to-June was also stronger. If so, the economy may be able to build on the momentum despite the rate hike.

The question is whether the tiny rise is a symbolic gesture or the start of a round of increases. The BOJ says that ZIRP is unnatural. By zapping it, the bank is signalling that the Japanese economy is back to normal. But fears have also been expressed about misallocation of resources encouraged by an easy-money regime, which extends life-support to walking-dead companies. Restructuring is being impeded, say the critics, who also fear the return of a financial bubble as investors use cheap money to gorge on speculative investments. The BOJ may keep interest rates steady for a year or so — N-ZIRP (near zero interest rate policy), if you will. Or it may move more aggressively as it grows confident that the economy is recovering. On second thought, keep holding your breath.

Write to Asiaweek at mail@web.asiaweek.com

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