Japanese bank cuts key rate Low borrowing costs could boost imports

February 04, 1993|By New York Times News Service

TOKYO -- After more than a week of tense behind-the-scenes prodding, the Bank of Japan announced Thursday morning that it had cut its official discount rate to 2.5 percent, from 3.25 percent, in an effort to revive a badly weakened economy.

Thursday's sharp reduction in the discount rate, which is what the central bank charges commercial banks for short-term loans, was effective immediately. It brought the rate down to match the low set during the economic boom of the late 1980s. The rate is also a benchmark that affects other rates banks charge for loans and offer on deposits.

On Thursday, several senior officials said the Bank of Japan would finally announce the reduction after an extraordinary meeting of its policy-making board. So there was no surprise in the decision, which appeared to have little effect on the price of Tokyo stocks after it was announced.

Yasushi Mieno, the Bank of Japan's governor, has come under harsh criticism for his apparent reluctance to reduce the discount rate. Some in the central bank are said to have feared that such a reduction might set off inflation in stock and real estate prices.

Mr. Mieno had repeated Thursday that "the economy remains in a severe adjustment phase," the language he has used in recent weeks to acknowledge the degree of the slowdown. The economy is expected to grow by less than 1.5 percent in the fiscal year that ends March 31.

Pressure for the reduction in the key lending rate also came from the United States and Japan's other leading trade partners.

Japan's trade surplus has soared over the past two years, breaking records in 1992 as it topped $100 billion. The surplus was expected to rise further this year, in part because the weak Japanese economy has reduced the country's appetite for imports.

In Washington, Secretary of the Treasury Lloyd Bentsen issued a statement saying: "We welcome the reduction in Japanese interest rates in light of recent economic conditions. It should help to strengthen domestic demand and, in turn, help shrink Japan's very large external surplus. And it will assist in strengthening world economic growth."

Pressure on Japan to act has increased with the arrival of the Clinton administration, which is viewed here as tougher on trade issues than the Bush administration. In addition, Japan will play host in July to the next meeting of leaders of the world's seven top industrial nations, the Group of Seven. Political leaders have insisted that the government take strong action to halt the rise of the trade surplus to avoid criticism then.

Evidence of the Japanese recession has been growing. Consumer spending has dried up, corporations have slashed their capital spending budgets, profits are down for the third year, and banks have slowed lending because of a mountain of bad debts left from the collapse of equity and real estate markets.

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