Throwing yen at the Japanese

Over the past few years, Japan's recession fighters have pushed on one start button - frequent boosts in public works spending - to get the country's economic engine going.

But all they got was a sputter.

Now the central bank has put a booster cable on the world's second largest economy by cutting short-term interest rates. The Bank of Japan's goal: expanding the amount of yen available for investments and spending.

But will this new tactic work?

Despite a shrinkage of economic output last year and a rise in unemployment, the move may bring some positive growth, says American economist Paul Kasriel Northern Trust Co. in Chicago. He's not sure by how much.

Robert Brusca, an economist in New York with Nikko Securities Co. International, the American arm of a Japanese brokerage house, says, "People are getting a little more optimistic."

Both Mr. Kasriel and Mr. Brusca belong to a host of economists and analysts in the United States who follow Japan's economy in some detail because of its effect on US financial markets.

For instance, US Treasury bond prices have been whipped about by Japanese actions in recent weeks. When the Japanese government announced a large new issue of bonds to finance its massive budget deficit, long-term interest rates rose on Japanese bonds.

That sent bond and stock prices falling around the world. Higher Japanese interest rates mean greater competition in the world's pool of capital.

Prices on Wall Street plunged again Feb. 12 when the Bank of Japan, after announcing a reduction in an influential overnight interest rate to slightly above zero, also indicated it would not take more aggressive steps to halt the rise in long-term rates.

Then, last Tuesday, Japan's Ministry of Finance (MoF) reversed that stance. It announced it will temporarily resume its outright bond purchases.

US Treasury bond prices rallied.

American officials have for years been urging Japan to rev up its economic motor. Last November, the Japanese did announce a 24 trillion yen ($209 billion) government spending program, the latest and largest in a series of such actions. That spending is now having an impact on the economy.

Recently, The Wall Street Journal reported that US Treasury officials have implored the Bank of Japan to expand the money supply to further stimulate the economy. Secretary of the Treasury Robert Rubin would not confirm that report when asked about it last week

But Mr. Rubin and other US officials, from President Clinton down, have often called for a more boisterous Japanese economy. This would bolster South Korea, Indonesia, Thailand, and other Asian economies that are just starting to recover from a financial crisis that began in 1997.

A vigorous Japan would also import more American products and ship fewer goods across the Pacific to the US.

Japan's slump has lasted nine years.

Industrial output is lower than in 1986, notes Carl Weinberg of High Frequency Economics, an economic consulting firm in Valhalla, N.Y. Fewer people are employed in Japan than in 1992. Stock prices are still down 70 percent from their peak. Real estate prices are down 75 percent. Prices are falling.

Both Kasriel and Mr. Weinberg place great importance on Japan's money supply growth. Money fuels business and consumer purchasing activity.

At the end of January, Japan's money supply was up 3.6 percent from the same time in 1998.

A 10 to 15 percent growth rate in money is necessary to restore vitality to the Japanese economy, Weinberg says.

Kasriel calls for 6 percent. "Fiscal policy without monetary policy isn't very potent," he says. "If Japan keeps printing money, it will have some effect."

ONE way governments pump up money supply is to "monetize" government bonds. The Bank of Japan buys government bonds, giving the sellers checks that cost the bank nothing but can be spent by the sellers. This expands the nation's money supply.

But the Bank of Japan has been prohibited from buying these bonds directly from the government. This reflects fear of a renewal in post-World War II inflation and a rebirth of the 1980 bubble in stock and real estate prices.

Concerned with rising long-term interest rates, the MoF said last Tuesday it will buy government bonds for its Trust Fund Bureau. This fund invests money deposited in Japan's giant postal savings network.

To Kasriel, this is an ineffective bookkeeping shuffle between government accounts. However, he adds, to maintain its new 0.15 percent overnight rate, the Bank of Japan will have to buy securities from the private markets, not directly from the government. That too will create new money.

At the end of last week, it became clear in Tokyo that expansion of the money supply was indeed the bank's goal as it forced interest rates down to near zero. The yen weakened against the US dollar.

Weinberg, however, notes there is lag between monetary expansion and its effect on the economy. So he expects Japan's economy to continue contracting for five months or so.

"Scary!" he says.

The merit of US calls on Japan to take more stimulative action is debated. US Treasury officials certainly wouldn't publicly say the same thing to the Federal Reserve, notes Weinberg.

Peter Kenen, a Princeton University economist, wonders if such US intervention has "outlived its usefulness," merely prompting resentment in Japan.

At an earlier time, Japanese economic policy was largely conducted by the bureaucrats of the Ministry of Finance or the Ministry of International Trade and Investment.

Now such policies are keenly debated by the public and politicians. Moreover, the Bank of Japan became more independent from the MoF last spring. It is more like the Federal Reserve in the US.

"Some Japanese like [the American advice], some don't," says Douglas Ostrom, an economist with the Japan Economic Institute in Washington.

Favoring US advice, Mr. Brusca says, "If nobody pushes, nothing happens."