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Japan slashes bank rate to almost zero

Jeremy Hobson Oct 5, 2010

Japan slashes bank rate to almost zero

Jeremy Hobson Oct 5, 2010


Kai Ryssdal: We’re gonna take a little detour as we get going today. Dateline Tokyo, Japan. The Bank of Japan came out with a new plan to jump start that country’s economy this morning. Dropping interest rates to just about zero. Ought to sound familiar to you. The Federal Reserve’s has been holding its key interest rate near zero for almost two years now. By most accounts, that’s the preferred treatment for an economy stuck in a lasting slump. But Japan has tried this medicine before and it didn’t go so well. So the somewhat frightening question becomes, who is copying whom?

From New York, Marketplace’s Jeremy Hobson has some answers.

Jeremy Hobson: This is the third time Japan has tried a zero-interest rate policy since the 90s, but neither of the previous experiments worked.

Takeo Hoshi is a professor of international economics at the University of California, San Diego. He says they didn’t work because Japan pulled up the rug on the low rates too soon.

Takeo Hoshi: Each time they implemented the zero-interest rate policy, they seem to have stopped before the economy recovered.

U.S. policymakers know that, and they often cite Japan’s “lost decade” as a reason not to fear low rates. The country stopped growing for years in the 90s.

But if we’re trying not to follow Japan, and Japan is now following us, then who are we following? I asked Dan Cook, senior market analyst at IG Markets.

Dan Cook: It’s kinda in a way you might say the blind leading the blind, because neither of us really have a great deal of successful experience with this. Hopefully, the U.S. can be a model moving forward, but so far we haven’t seen anything and we still don’t know the long-term ramifications.

And remember, long-term thinking often gives way to dealing with short-term crises on both sides of the Pacific.

Fred Fraenkel is the vice chairman of Beacon Trust Company.

Fred Fraenkel: Everybody likes to put things in big long-term context, like Japan had a lost decade, they’re going to continue to stagnate, and the policymakers there are just probably look at what’s going on right now, scratching their head trying to figure out how do we stop this?

And since they’ve decided to go back to a zero-interest rate policy, let’s hope there’s a Japanese translation for the term, “Three times a charm.”

In New York, I’m Jeremy Hobson for Marketplace.

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