Decrease Of The Interest Rate example essay topic

387 words
The Bank of Japan (BOJ) carried out the zero interest rate policy. The decrease of the interest rate was expected to work for recovery of the Japanese economy. The interest rate was already very low and the analysts wonder its effectiveness. Due to the collapse of the bubble economy, the Japanese economy became sluggish and suffered from six trillion dollars debt. The increase of the government bonds caused the increase of the loan rte. It also caused the appreciation of yen and damaged the Japanese export companies because the stocks of the Japanese export companies were increasingly sold.

Because the Japanese economy is largely supported by the Japanese export companies, this situation worked against Japan. In January, 1999, the Japanese government issued twice as much government bonds as usual. Soon later, the BOJ decided to decrease the interest rate to zero in short-term money market. Consequently, life insurance companies, which lent money to banks and earn money by its interest before, were forced out of business in short-term money market. Life insurance companies instead began to buy government bonds.

Due to the increase of the demand of the government bonds the value of the government bonds remained the same even though the government issued bonds too much. As a result, the interest rate did not rise and money supply did not decrease. The zero interest rate policy was to some extent successful this time, but the interest rate cannot be decreased more than zero when the value of the government bonds decreases next time. Besides, most companies did not borrow from banks to invest new facilities even the interest rate is zero. Most companies had to downsize the organization and reduce employees and corporate bonds to survive in the recession. Even if they started new business and made new goods, Japanese consumers would not buy such things.

The Japanese consumers tightened their belts because they feared of bankruptcy and restructuring. The zero interest rate policy was not effective to most companies. The Japanese government should not issue twice as much government bonds as usual. Rather it should decrease the government spending on construction as it used to do. Many public funds were wasted on unnecessary construction.