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No. 38 — October 8, 1999

 

Feature Article

MONETARY POLICY, LIQUIDTY TRAPS AND THE YEN: THEORY VS. OPERATIONAL CONCERNS by Arthur J. Alexander

Summary

Japan's monetary policy recently has been the subject of considerable domestic and international debate, stimulated in part by the yen's appreciation since July. Although the Bank of Japan has pushed the interest rate on overnight interbank loans close to zero and has injected ¥1 trillion ($8.3 billion at ¥120=$1.00) of excess reserves into the banking system, critics have urged monetary authorities to go further and target either a positive rate of inflation or the growth of broad measures of the money supply. One argument behind these recommendations is that Japan is caught in a liquidity trap that renders conventional monetary policy measures ineffective.

The central bank is cognizant of the criticism and has addressed many of the concerns expressed by outsiders at its monthly meetings. However, BOJ's Policy Board is not convinced that a liquidity trap exists. The board also questions whether the recommended strategies would work if implemented. One obstacle to a more complete examination of new policies is the institutional experience and expertise of the BOJ staff. In particular, the operational details of money management seem to dominate serious consideration of what can be accomplished through policy changes.

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Weekly Review

 

NUCLEAR ACCIDENT, POLICY DIFFERENCE DELAY LAUNCH OF TRIPARTY GOVERNMENT
--- by Barbara Wanner

Prime Minister Keizo Obuchi announced September 30 that he was postponing the following day's scheduled launch of a new government — one that will include the New Komeito, the second-largest opposition party, in addition to the Liberal Democratic Party and the Liberal Party. He attributed the delay to the crisis caused by the accident at an uranium processing facility in Tokaimura, Ibaraki prefecture (see previous article). In view of the difficulties that the three parties encountered in finding common ground on key policy issues, however, some political experts suggested that Mr. Obuchi well may have missed his self-imposed October 1 deadline anyway.

 

SERIOUS ACCIDENT STRENGTHENS DOUBTS ABOUT JAPAN'S NUCLEAR POWER INDUSTRY
--- by Jon Choy

Japan's worst nuclear accident has rekindled popular doubts about the safety and the credibility of the domestic nuclear power industry. Attributed to human error and corporate mismanagement, the incident at a privately owned and operated nuclear fuel processing facility in Tokaimura, Ibaraki prefecture, less than 100 miles northwest of Tokyo, involved a nuclear fission chain reaction that exposed workers to high amounts of radiation and forced hundreds of thousands of nearby residents to stay indoors for more than a day. Unlike a similar problem at the Tokaimura complex two years ago, the government moved relatively quickly to report, assess and react to the disaster. Early on, the investigation revealed worrisome industry practices and gaps in government oversight. Nevertheless, energy policymakers in Tokyo say that the accident will not change the course of the country's nuclear power development effort.

 

NUCLEAR ACCIDENT, POLICY DIFFERENCE DELAY LAUNCH OF TRIPARTY GOVERNMENT
--- by Barbara Wanner

Prime Minister Keizo Obuchi announced September 30 that he was postponing the following day's scheduled launch of a new government — one that will include the New Komeito, the second-largest opposition party, in addition to the Liberal Democratic Party and the Liberal Party. He attributed the delay to the crisis caused by the accident at an uranium processing facility in Tokaimura, Ibaraki prefecture (see previous article). In view of the difficulties that the three parties encountered in finding common ground on key policy issues, however, some political experts suggested that Mr. Obuchi well may have missed his self-imposed October 1 deadline anyway.

 

JAPAN DEEPENS EAST ASIAN AID PROGRAM
--- by Marc Castellano

In a continuing effort to support economic recovery and reform in East Asia, Tokyo recently announced new aid agreements with Laos, Thailand and Vietnam. The Laotian deal, unveiled during an early October visit to Japan by a senior official, still is in the formative stages. However, aid administrators describe it as a comprehensive program. That suggests more help than the $530 million-plus in grants and technical assistance that Japan disbursed to Laos over the 1993-97 period. The aim of the package is to help the communist-ruled Southeast Asian country accelerate free-market reforms and establish a workable development plan.

 

NOTES

With no fanfare, Japan announced October 4 that it would contribute roughly $100 million to a United Nations trust fund to help finance multinational troops deployed to East Timor to restore peace and security. Violence erupted on the tiny island after the East Timorese voted overwhelmingly in favor of independence from Indonesia in a U.N.-sponsored referendum August 30. After some arm-twisting, Jakarta allowed an Australian-led international mission sanctioned by the United Nations into East Timor in late September. Canberra, Washington and the capitals of the other countries staffing the force of almost 9,000 people now in East Timor are covering the costs of their own troops.

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