Meanwhile, in Japan, a Different Vigil

Is the next move in Japanese interest rates up rather than down--and sooner than later?

As recently as a few months ago it seemed ludicrous to worry about higher Japanese rates. With the Japanese economy still on the ropes, even the lowest short-term rates in the world weren’t doing much to promote faster growth. In fact, the bigger concern was that a serious deflation--and depression--could loom, triggered by the country’s crumbling banking system.

But now economists are paying close attention to a sudden explosion in Japan’s money supply. James Grant, editor of Grant’s Interest Rate Observer newsletter, notes that Bank of Japan’s assets rocketed 16.4% in November. As it purchases securities to inflate its own assets, the central bank pumps huge quantities of money into the economy. At some point that money should begin to have the desired effect: spurring consumption and real growth.

The expansion of the Japanese money supply demonstrates that Bank of Japan finally understands that it can’t simply keep interest rates low (its “discount” rate is 0.5%, versus the Federal Reserve Board’s 5.25%) and pray the economy revives. An economy suffering from a deep crisis of confidence needs a much more proactive central bank to flood the system with cash and signal that it’s OK to spend again--as the U.S. Fed did from 1991 to 1993.

Will it work in Japan? Grant notes that Japanese bank stock prices have been surging, leading the Tokyo stock market to 11-month highs. If the bank-stock buyers are correct, and Japan’s financial system rebounds, so should the economy.

But then, so will interest rates: Alexander Kinmont, investment strategist at Morgan Stanley & Co., figures an economic recovery could begin to force Japanese interest rates higher sometime late in 1996. And that could pressure other country’s rates as well. “The Bank of Japan has stepped on the gas,” Grant says. “Lovers of ultra-low interest rates may begin to worry.”