Bank of Japan’s 1999 Zero-Rate Policy Triggered by Yield Surge
A jump in Japanese bond yields prompted the central bank to cut interest rates to near zero in 1999, according to policy meeting transcripts released today.
The Bank of Japan lowered its overnight lending rate to almost zero percent in February 1999 to prop up economic growth and avert deflation. With the key rate already at 0.25 percent, board members also debated what the bank could do after using up interest rates as a policy tool.
“With some room left for a rate cut, we can try to exhaust interest-rate tools first and then examine what we can do next, while it’s fully worthwhile to study easing the quantity” of money, said Masaru Hayami, then central bank governor who passed away in May of this year at the age of 84, according to the transcripts published in Tokyo today.
Japan’s central bank adopted so-called quantitative easing two years after it implemented the zero-rate policy. Central bankers in the U.S. and the U.K. have adopted the tactic of slashing rates to almost zero and flooding the banking system with cash as they battle the worst global economic crisis since the Great Depression.
The central bank releases minutes of its board meetings one month later, without identifying who makes comments. It unveils transcripts of entire discussions with speakers’ names 10 years later. The bank today published full accounts of the meetings of the first six months of 1999.
‘Biggest Threat’
“A jump in long-term interest rates is the biggest threat” to the Japanese economy, Toshio Miki, a central bank board member, said at the February meeting.
Then-Deputy Governor Yutaka Yamaguchi said at the same meeting: “As long as there is something left for us to do with interest rates, we should try to exhaust that option” to counter drastic market moves cash loans.
Yields on Japan’s benchmark 10-year bonds jumped to 2.3 percent in February 1999 from about 1 percent in December 1998 after the Ministry of Finance stopped buying government bonds from lenders. The yen rose 3 percent in the same period. The volatile market moves prompted the government to pressure the central bank to take action, the transcript shows.
“I was asked by one minister why the Bank of Japan doesn’t underwrite government debt or buy a massive amount of bonds,” Hayami said at the January 1999 meeting, the transcripts showed. The bank should stick to its self-imposed rule of capping its bond purchases with the amount of bank bills in circulation, Hayami said, signaling he was committed to averting monetizing government debt.
Ten Years On
Ten years on, the Bank of Japan’s key rate is once again close to zero. Current Governor Masaaki Shirakawa and his board cut the rate to 0.1 percent in December as the global financial crisis pushed the country into its worst postwar recession.
Shirakawa has indicated he’s unwilling to push the rate even lower, saying that would make money-market trading unprofitable.
In April 1999, two months after introducing zero rates, Hayami said at a press conference that the board would maintain the policy “until deflationary concerns fade.” He made the announcement after policy makers including Deputy Governor Yamaguchi said the lack of an explanation might make traders and investors suspect they would unwind the policy prematurely.
Miki said in March 1999 the bank needed to decide how to exit from the zero-rate policy should the economy recover.
Filed under: money by Wolf