Japan goes for zero interest rates

Japan’s central bank today decided to guide down interest rates to near zero amid growing alarm about the country’s economic woes both at home and abroad.

While it stopped short of directly cutting interest rates, the Bank of Japan decided to take other measures, such as increasing the money supply, that will have the same effect.

Hopes for an easier monetary policy had been growing in political and business circles, as worries about the future of the Japanese economy sent stock markets in Tokyo and New York plunging.

BOJ Governor Masaru Hayami has long tried to resist such pressure, saying that counting on monetary policy to achieve economic growth would not work without taking care of the nation’s massive bad debt problem.

But the recent spate of bad news about Japan’s economy and the damaging effects they had on Wall Street last week prodded the central bank to change course.

Over the past week, political leaders and some banks have shown more resolve to deal with the debt problem, which many view as being at the crux of Japan’s decade-long economic slowdown.

Another danger facing Japan is deflation, a situation in which prices continue to fall, threatening to start a downward spiral that pulls down income and profits.

The bank’s decision comes as Prime Minister Yoshiro Mori is in Washington to meet US President George W Bush. What would come of those talks is questionable, given that Mori is expected to step down as early as next month.

Mori, one of Japan’s least popular prime ministers, has been plagued by gaffes and scandals, and public dissatisfaction has been growing over his apparent inability to boost the economy.