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Friday, January 24, 2003

Japanese Interest Rates Briefly Fall Below Zero

Japan's continuing economic problems took the world of economic data into new and previously uncharted territory on Friday as overnight call rates fell below zero for the first time in the country's history.The overnight call rate on Y15bn of funds traded between foreign banks fell to minus 0.01 per cent. Because of the negative rate, borrowers are in effect being paid for borrowing funds because they will have to pay back less than they were lent. however much of a technical one-off this may be, it does serve to attention to the copmplex character of Japan's difficulties in a particularly novel way. Of rather more significance is the continuing fall in long term interest rates. Rates up to ten years are now virtually horizontal, and the curve up to thirty years is now showing signs of flattening out. It appears the expectation of continuing deflation is really setting in long-term

With long-term interest rates already virtually nil under the Bank of Japan's "quantitative easing" policy, bankers said on Friday the move into negative territory was more a symbol of the country's decade-long economic malaise rather than an indicator of future financial chaos. Critics say that the BoJ's ongoing zero interest rate policy and it decision to flood the market with liquidity has been ineffective in stimulating the economy.

"In terms of monetary policy, the BoJ is not doing enough," said Hisashi Sitow, director at Credit Suisse First Boston in Tokyo. "It has to buy more JGBs or foreign bonds to affect the market. Monetary policy is clearly ineffective, as base money is increasing but growth in the money supply is stagnant." Current record low yields on Japanese government bonds indicate that investors are not betting on an economic rebound anytime soon. The 10-year JGB has been skirting new four-year lows for some weeks, while the yield on the five-year bond fell to a record low on Friday."This is all part and parcel of a growing loss of faith in Japan's future," said Marshall Gittler, strategist at Deutsche Bank in Tokyo. "JGB movements are telling a story that deflation is set to continue indefinitely."
Source: Financial Times

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