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Monday, March 20, 2006

JAPANESE PERSPECTIVES

What the Merchant of Venice might think about BOJ policy


"The quality of mercy is not strained."

So Shakespeare tells us through the words of Portia, that intrepid heroine of the Bard's account of financial dealings in the city state of Venice.

The quantity of money likewise has been unstrained for the past five years in Japan. Indeed, while Shakespearean mercy ". . . droppeth as the gentle rain from heaven upon the place beneath," Japanese money has been pouring down on the economy in relentless bucketfuls by virtue of the Bank of Japan's ultraloose monetary policy.

Not any more, though. Earlier this month, BOJ Gov. Toshihiko Fukui announced he was ending the quantitative easing policy whereby the BOJ flooded private-sector banks' current accounts with cash in order to beef up their lending ability. Things did not go quite as the central bank had hoped.

Nonetheless, the economy is now certainly in much better shape than it has enjoyed for quite some time. Moreover, prices are not going down any more. At least not in the persistent way that had become the norm over recent years.

They are not going up by all that much either, but deflation as defined by a sustained decline in the general level of prices seems to be mercifully behind us. Given the evidence, the BOJ's eagerness to return to a less eccentric form of monetary policy is quite understandable.

Shylock the moneylender, who poured scorn on Portia's championship of mercy, would be pleased. If he were a citizen of 21st century Japan rather than 16th century Venice, the shrewd usurer would no doubt be totally scandalized by the way the BOJ has been throwing money about for no apparent gain all these years. News of the ending of such a bizarre way of managing the financial market would prompt him to breathe a sigh of relief.

He is, however, unlikely to be ready to give the BOJ full marks quite yet. For there still remains one more problem from the Shylockian point of view. It is a problem the BOJ has in common with the moneylender's arch enemy, the merchant Antonio.

Antonio, whose pound of flesh Shylock so covets, knows nothing about interest rates. "He lends out money gratis." This makes Shylock very angry, because by lending money for free, Antonio "brings down the rate of usance here with us in Venice."

The BOJ may have decided to strain the quantity of money, but it still remains committed to lending money out gratis. Or at least to the kind of monetary management that induces the lending out of money gratis. So it looks as though the rate of usance here with us in Japan is not about to reach levels that meet with Shylockian approval just yet.

Or is it? How well will the BOJ succeed in maintaining a "zero-interest-rate" environment absent a formal framework for quantitative easing?

No problem, some would say, since they were doing it before. To be sure, a zero-interest-rate policy was in place before the introduction of quantitative easing in 2001. But back then, circumstances were such that people were unlikely to complain much about the rate of usance being brought down, even to zero.

Shylock would have had a tough time making his voice heard in those days of spiraling deflation, mounting nonperforming loans and surging company failures. Nowadays, however, he may actually find quite a lot of supporters -- not only among fellow moneylenders, but also among the general citizenship, whose financial assets have been earning them nothing for so long.

Antonio needed Portia's ingenuity to escape having to forfeit his flesh. Let's hope the BOJ can make it on its own.

Noriko Hama is an economist and a professor at Doshisha University School of Management.


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