A FATAL MISTAKE IN THE FINANCIAL POLICY OF JAPAN
AND A SUGGESTED REMEDY

author : TAKAO SHIMANO
President
SHIMANO & CO., LTD.
JAPAN

The extreme low interest policy now in Japan is a big mistake.
Never, in all ages and all places have we experienced such a low rate as
0.1%.
Nobody wants to put money in a bank if you only get 1$ after depositing
$1000 for a year. The case of a current account, a depositor does not
complain of the rate because business money is always going out.
However, for a household account, this is quite different.
From a household account, money is drawn out of a deposit as required
for the present. Therefore, the rest of the money is kept in the account.
If the interest for an ordinary account is 0.1%, the bank keeps the profit and
the customer loses.
Formerly, interest for an ordinary account was held at 3.5%.
It was 35 times as much as the present rate of 0.1%.
That was the normal state of the economy and common sense finance.
Nobody dreamed of such an abnormal situation that we see nowadays.

Anyway, we must realize that

EXTREME LOW INTEREST RATES

are the main cause of the depression.

We have to realize that this extremely low rate of interest, practically as
low as no interest at all, is the main cause of the depression.
Due to harm by this extremely low interest, property income to
household accounts has fallen. Deposit incomes from ordinary accounts
have dropped in 43 million (*a) households.
Namely, as is shown in table *1, household income from interest has been
kept down for five years, from 1991 to 1996
(Annual calculation of national economy, by the Economic Planning Agency, 1998, Page17)

table *1. Household income from interest (including private company)

(Annual calculations of national economy, by the Economic Planning Agency of Japan, 1998, Page17)

What is the reason of such a sudden decline?
I, as an author, have made an investigation into the interest rate of an
ordinary account in Japan.
Consequently, the interest rate of an ordinary account is shown as in table
*2 (decline of interest rate in an ordinary account in Japan)

‚”‚‚‚‚Œ‚…@*‚QD‚„‚…‚ƒ‚Œ‚‰‚Ž‚… ‚‚† ‚‰‚Ž‚”‚…‚’‚…‚“‚” rate in an ‚‚’‚„‚‰‚Ž‚‚’‚™ ‚‚ƒ‚ƒ‚‚•‚Ž‚” ‚‰‚Ž ‚i‚‚‚‚Ž

As described in table *2, the rate of an ordinary account has been kept
down to 0.1% (including 1991) up to July of 1998, for six years.
Consequently, due to the misleading policy of maintaining 'the low rate
the better', taken by the authority of the Bank of Japan, the rate of an
ordinary account has been kept down to this extreme low level of 0.1%.

Due to this low interest, a household looses its power to purchase.
Even if a household intends to buy goods for consumption, it has already
been deprived of fundamental capital.
This demon 'Extreme low interest' kills the original power of the
household. It is more fatal and basic problem than the high
consumption tax (5%) in the weakening power of purchasing will.

This is not the general term of 'Repay bad loans and activate business' as
spoken by many people.
The bad loan problem of banks is caused by their reckless management so
far. They should clearly repay bad loans by their own means and
responsibility.
The government and the Bank of Japan should take responsibility for
neglecting their duty and letting so many banks fall into such reckless
management.

Then, what in the world is the solution?
We have only one policy to take. No other solution but this one. The
only way is to select a policy in order to give the benefit of interest to
households.
Raise the interest of ordinary deposit, not those of term deposits or fixed
deposits. Raise the interest up to at least 2%, instead of 0.1%, which is
nominal or flat.
I, the author, have a reason for stating annual interest at 2%.
It was the actual interest rate up until recently.
In fact, since September 17th., 1990 to July 28th. 1991, the interest rate of
ordinary accounts was set at 2.08%.

(Annual statisics of economy, by the Bureau of Statistical Investigation,
issued by the Bank of Japan, 1997, Page145)

Some people refute that the term between September 1990 and July 1991
was in the wave of high prosperity and that therefore high interest rates
were quite natural. However, after a short period, the rate went down
suddenly. It is just a natural result. This was the starting point of the
extreme low rate of interest that is a mistake in financial policy.

Raising the annual interest of ordinary account to 2%, as I stated above,
means that the annual interest for the ordinary accounts of households
should be raised to 2%.
In table *3 (balance sheet) it is shown how much a household (including a
private account) saves as deposit, currency deposit and the other deposits
which are the household's financial property. The amount of currency
deposit is 90,876,700 million yen and the other deposit is 583,404,600
million yen. The total amount is:

table *3: term-end balance sheet of household (including private company)

1. omission

2. omission

3. omission

4. financial property ---- 1,176,805,200 million yen

(1) cash currency -------- 42,056,700 million yen
(2) currency deposit ------ 90,876,700 million yen
(3) other deposit -------- 583,404,600 million yen

(4) - (7) omission

(Annual calculations of national economy, by the Economic Planning Agency, 1998, Page331)

674,281,300 million yen

WE DEMAND 2% ANNUAL INTEREST ON THIS AMOUNT

We demand ;674,281,300 x 0.02 = 13,485,600 million yen as annual interest.
Banks may be surprised because interest to households is paid by them.
However, this is a crucial moment for the government and the Bank of
Japan.
It is a big chance to save the nation. Japan can not proud of being
the best creditor nation in the world if Japan can not put this into effective
action. It is just a domestic matter, after all. It is a remedy that does not
require any assistance from foreign countries, just domestic power.

After all, it is just a temporary policy toward inflation to save the economy
from minus growth, that is, production on a reduced scale.
No effective policy but extreme low interest is a kind of arteriosclerosis in
politics. We should take a proper interest policy in place of an extreme
low one.

2% annual interest is not so surprising. For those politicians who have
just one policy; that of extreme low interest such as 0.1%, this may be a
surprise. We do not have to worry to let a single yen abroad. Some
problems are, if any, how to get the 13,485,600 million yen interest stated
above and its aftercare.

Money should be supplied from deficit-national bonds, accepted by the
Bank of Japan. Nobody will complain, because the money will benefit
households all over Japan. Money which benefits households will return
to the government in the future as an increase in revenue. The economic
structure which is minus growth, production on a reduced scale, will be
naturally changed the following year. Negative opinion such as after care
and so on will disappear. Not only the USA but also other countries are
waiting for the resolution of the financial policy of Japan.
It is true that lower interest rates are better, however, many countries
despise and are sick of a negative policy such as a low rate of 0.1%.

Foreign exchanges and the yen-dollar rate are always watching Japan's
financial policies. Even if Japan sometimes requests the US government
for co-operation in support of exchange rates, which is a cheap trick, the
Japanese yen rates always fall very soon, because Japan has no clear
resolution of its own. It is correct opinion that Japan does not desire a low
yen rate, but instead a high yen rate for advantages in import trading and
overseas investment. Large amounts of money (*b: 15,927,000 million yen in 1997)
are paid for overseas investment every year, and this is paid in US dollars in
exchange for Japanese yen. A high yen rate has an advantage for investment.
(*bFthe Survey of economy, by the Economic Planning Agency of Japan, 1998, Page190)

Here we have a policy to reduce the interest paid to households as I stated
previously. That is to cut the interest of 2% to 1% by tolerance. Namely,
that is cutting the 2% interest of 674,281,300 million yen to 1%. Then the
interest to be paid should amount to 674,281,300 x 0.01 = 6,742,800 million
yen, which is exactly half. In my theory, 2% of annual interest payment is
proper, but I took the amount of deficit covering bond into account. The
benefit to household will be reduced, however, the amount of deficit
covering bond that is paid by the Bank of Japan will be cut in half.
Nevertheless, it is a drastic policy to save the Japanese yen from low rates.
We can expect considerable effects from that policy.