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[Editorial] Interest Rates Still Going down, But . . .

Posted August. 11, 2001 08:30,   


The Finance Currency Committee reduced the call rate again after only one month. Its impact caused the open market interest rates to enter in the 4 percent for the first time. A last resort measure to improve the economy by stimulating provisional investment and consumer spending, it remains a question how effective the continuing interest reduction will be.

The ideal time to change interest rates is before the projected date for economic slowdown in June, but, regretfully, the administration insisted until a day or two ago that the economy will improve and ended up missing the best opportunity for lowering interest rates. The domestic market crash on the day that the currency department announced the rate reduction was a sign that it did not even achieve the desired psychological effect.

Meanwhile, worries over potential problems caused by low interest rates are mounting up. If the consumption rate atrophies due to a decrease in the income of wage earners and white-collar workers who depend on the market, it can worsen the economic stagnation. Consumer research institutes report that consumption rates are already decreasing in the third period.

A bigger concern is the possibility that the lower interest rates may force companies at the brink of critical junctures to loses the motivation to make actual improvements. It is not likely that the economic strength of weakened companies will improve simply because the interests rates are lower.

Also, lower rates are not improving the corporations’ provisional investments. Constant reduction of interest rates when investments are not improving may create a situation where capital recycles only within the financial sector and the economy falls into a liquidity trap. Although the currency department is strongly ordering lower interest rates, they must be careful not to reproduce the Japanese 0-percent rate phenomenon, even if the conditions are different this time around.

The present challenge for the administration is how it can use the lower interest rates to the economy’s advantage. Its priority should be to alleviate the corporate distress over the future of the market and give them confidence in the policy. The results from the government’s joint party policy conference were unsatisfactory. Rather than operating within the sphere of functional companies as the circumstances permit, the government must actively generate and implement a policy that can induce investment. The time to choose a policy is running out.