ACTION IN JAPAN

apan's Ministry of Finance deserves credit for moving Tuesday to lower long-term interest rates by resuming purchases of government bonds, at least temporarily. This was the type of action the Bank of Japan should have taken last week.

Instead, the central bank chose to lower its overnight call loan rate to 0.15 percent from 0.25 percent. The rate cut was ineffective because it did nothing to bring down long-term bond yields. The recent rise in government bond yields and the strength in the yen were having real, damaging effects on the Japanese economy. By bringing long-term rates back down, Japan should be able to avoid a renewed downturn in its economy, the feared double-dip recession.The verdict of the markets on the Bank of Japan's action was: Not enough. Economists wondered how a country could ease monetary policy when short-term interest rates were already so low. To expand the money supply further, the Bank of Japan will need to make direct purchases of government bonds.

The Japanese central bank is understandably reluctant to ''monetize'' the government's debt by buying bonds, fearing that this could lead to hyperinflation. We feel, however, that these fears are misplaced. What Japan should really fear is a continuation of the deflationary forces that have gripped its economy.

Japan needs to print more money to stimulate its domestic economy and to put a floor under the dollar's exchange rate. If the yen remains strong and government bond yields remain high, Japan's exporters will suffer and there will be no logical reason for business to make capital investments. The United States has more to fear from a deepening Japanese recession that reduces world trade growth and hurts U.S. exports than from cheap Japanese imports. A strong yen is not in Japan's best interest right now.

Japanese government sales of debt are slated to be huge, and the supply pressure will push Japanese bond yields back up, putting upward pressure on the yen. There likely will be further rounds of foreign exchange market intervention to restrain the yen, but such actions can only work over the short term.

The Bank of Japan will not directly control long-term rates in the future, but it will be forced to buy government bonds if long-term rates rise excessively. It needs to transform itself from an ''inflation fighter'' into a ''deflation fighter.'' Economists have said that, since it takes time for any monetary strategy to take effect, a reflationary policy would be more effective in bolstering the economy and stabilizing financial markets if it is adopted sooner rather than later.

If Japan's economy turns downward again, all of Asia will have a more difficult time recovering. Another round of borrowing to fund some more stimulus packages would place Japan on a slippery slope. The Bank of Japan should realize it has a weapon at hand to fight deflation: direct purchases of government bonds.

To take pressure off the long end of the market, the Ministry of Finance said it will cut the size of its March issue of 10-year bonds and increase the two-year and six-year issues. However, the ministry has not decided whether it will continue the buying operation and decrease the 10-year bond issuance after April.

Bank of Japan Governor Masaru Hayami said the central bank may consider another easing in policy, if necessary. He said the bank is trying to lower the call rate as much as possible and will tolerate the rate trading near zero in the future, if needed. This won't be necessary if it buys bonds directly from the government.

The independence of the central bank is not what is at stake here. The Bank of Japan must avoid this political ploy and compromise on bond purchases in the best interests of the country and the world.

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