Japan Money Policy Shift May Slow Growth in U.S. : Economy: Weak yen, shaky Tokyo stock market threaten cash pool that has bankrolled U.S. borrowing.

The wellspring of Japanese cash that has bankrolled the U.S. government’s borrowing spree may be drying up, threatening to increase interest rates and pare economic growth in the United States.

Economists say the weak yen and shaky Tokyo stock market are ushering in a shift in Japanese money policy that could squeeze funds and ultimately boost the costs of borrowing in the United States.

“Japan’s days as the world’s banker are over,” said Kenneth Courtis, economist at Deutsche Bank Group in Tokyo. “Japan will not be the lender of last resort.”

Nearly 75% of Japan’s net capital outflow between 1987 and 1989 went to the United States, constituting more than half of U.S. borrowing from abroad.

Japanese investors have bought about one-third of U.S. Treasury bonds auctioned in recent years, providing a source of cash for the massive U.S. budget deficit and $3-trillion public debt.

If the Japanese pare their investments by half, as some economists believe may happen, U.S. interest rates could climb three-quarters of a percentage point from their current level of 8.59% on the 30-year Treasury bond.

“The Japanese have been there to ensure that U.S. debt can be sold at a reasonable price,” Courtis said.

But that may now be changing. “We’re taking a second look at U.S. bonds as they have lost some of their attractiveness,” said a manager at one of the Japanese life insurance firms, which have become major overseas investors.

Even a slight rise in interest rates for U.S. government bonds could lift borrowing costs throughout the economy, dampening already weak U.S. growth.

Japan earned a reputation as the world’s banker after the 1985 Plaza Accord, which sent the yen soaring and the dollar crashing lower as major industrialized nations tried to boost U.S. exports and pare the huge Japanese trade surplus.

An ample and growing supply of money in Japan combined with low interest rates provided an almost unlimited pool of cheap funds for investment.

The combination sent Tokyo Stock Exchange share prices soaring, giving Japanese companies an easy way to raise funds.

But with interest rates now creeping higher throughout Europe, especially in West Germany, Japan has been forced to raise interest rates as well in a bid to prevent the yen from falling and triggering an inflationary spiral.