Zero Zero Zero
biz.scmp.com
Friday, August 16, 2002
Economy cowers from Japanese zeros
CATHY HOLCOMBE
Japan hit a new low yesterday in its ill-starred efforts to revive its economy when a sale of short-term treasury debt produced an interest rate of zero.
It was the first time the record books had recorded a yield of 0.000. However, the Finance Ministry was quick to point out that the bidding actually produced a yield of 0.0009 per cent, but that the records only go to the third decimal place.
While technically the debt has a miniscule yield, economists say the "0.000" probably does a better job of summing up the potential of Japan's policies to stimulate the ailing economy.
"It's an expression of the absurdity," said Morgan Stanley managing director Robert Feldman.
Japan has relied on two sometimes conflicting policy legs in its long struggle to stimulate the economy - reflationary spending and liberal creation of money supply.
The reflationary programme has largely involved funding big, often white-elephant public works projects, for which the country must issue debt to finance. But that process soaks up liquidity, as nervous banks would rather hold government debt than lend to people or companies.
That is where Japan's central bank, the Bank of Japan (BoJ), has stepped in. Because the BoJ cannot use interest rates to stimulate the economy - deposit and lending rates have for the most part been at zero since February 1999 - it tries to increase money supply by buying up government debt.
Mr Feldman says the situation shows that the central bank is doing its job, at least. By making treasuries less appealing to hold, banks should, theoretically, have incentives to use their money better elsewhere.
But until the government enacts structural reforms that clear out the sick companies created in the bubble years, money will stay, essentially, under the mattress.
"Japan is in a liquidity trap," says Peter Morgan, chief economist at HSBC Securities in Tokyo.
"Demand for loans is fundamentally weak because companies are trying to pay off debt so nobody wants to borrow . . . banks have limited ability to lend even if the liquidity is there. They're quite cautious and they don't want to simply lose the money."
Andrew Heading, head of fixed income research at JPMorgan in Tokyo, said banks cluttered with poorly performing loans should be allowed to go under, as well as ailing companies whose existence revolves more around servicing debt than creating new business.
Until such hard decisions are made, Japan will continue to build monumental bridges with scant passenger traffic, and banks will get by with the scrawny yields available on their government debt.
How scrawny? Take yesterday's one-year treasury bill auction. At a yield of 0.0009 per cent, a bank investing one trillion yen (about HK$66.62 billion) could make, over the course of a year, a paltry 9,855 yen.
"That's not a get-rich quick scheme. It's barely even a get-rich slow scheme," said Bank of America currency strategist Marshall Gittler. |
