NEW YORK (MktNews) - Analysts and economists, although welcoming the 0.15 point cut in the discount rate as a sign the BOJ may be ready to take further stimulative steps, said the rate cut itself will do nothing to jolt the Japanese economy out of its doldrums.
"Cutting the discount rate ... is unlikely to have much of an impact," said analysts at Brown Brothers Harriman. "Japanese banks have little incentive to borrow from the central bank at the discount rate, since it is seen as a last resort source of funding."
The Bank of Japan Thursday left its benchmark overnight lending rate unchanged at 0.25% after its meeting Friday, but cut the discount rate to 0.35% in a largely symbolic move.
But Richard Jerram, an analyst at ING Barings in Tokyo, argued that the BOJ steps were more substantive than many market players give them credit for. "The BOJ cut in the ODR to 0.35% from 0.50% combined with the standby lending facility at ODR means the move is not as symbolic as most comments suggest. It means that troubled institutions will have access to cheaper funds in the event they have to borrow from the BOJ at the discount rate," he said.
Indeed, some analysts view the new BOJ liquidity provision facility (similar to the Bundesbank Lombard rate) as providing a safety net for financial institutions not wanting to lose face by going to the discount window.
This new "Lombard-like" facility will be implemented in March 2001 and will serve to prevent a sharp rise in short-term interest rates, providing funds to banks at a rate between the discount rate and the unsecured overnight call rate.
Overall, however, most economists were disappointed that the BOJ did not take more decisive action in providing liquidity to the market. "Anyone who was looking for the BOJ to act decisively to boost liquidity in the economy would have been disappointed by these results," said Carl Weinberg, chief economist at High Frequency Economics.
Additionally, Weinberg also voiced disappointment with the government's lack of firm action to boost stock prices in time for the fiscal year end and expects a substantial drop in both bond and stock prices next week.
The LDP panel assigned to suggest measures to prop up the flailing Japanese stock market, announced there should be regulatory measures taken to enable companies and their subsidiaries to buy back their own stocks. After a holiday on Monday, the BOJ will present its latest monthly assessment of the Japanese economy on Tuesday. The report will be picked apart for suggestions that the BOJ may now be in agreement with the government. Up to now, the government has been downgrading its evaluation of the economy, seemingly at loggerheads with the BOJ, analysts said. Analysts also voiced concerns about U.S. Treasury Secretary Paul O'Neill's approach to Japan. A recent New York Times article suggests that O'Neill would "abandon Washington's constant stream of advice to the government in Tokyo and try working directly with Japanese executives he came to know while running Alcoa." The article further said O'Neill wanted to introduce "price competition" to Japan, noting that it was exactly that kind of competition from abroad that reformed American industry in the late 1980s and early 1990s. But, as the article points out, these are the same Japanese executives with whom O'Neill hopes to work, the ones that have spent years fighting low-priced competition both foreign and domestic. Marc Chandler, currency strategist at Mellon bank, agreed with the assessment, "To the extent that this doesn't simply reflect a stylistic change, it is disingenuous: price competition is a Trojan horse. "To really allow price competition, it would require a dramatic re-orientation of Japan's political economy, which favors producers over consumers." At next weekend's G-7 meeting of finance ministers and central bankers in Palermo, Italy, you can be sure that economic dynamics of the U.S. and Japan will be front and center, analysts said. The combined effect of slumps in both nations, which according to the above New York Times article, make up 40 percent of the world economy, is already being felt around the globe. Most economists would love to be privy to next week's closed door meetings, where Japanese officials are assured to be grilled by other world leaders including Federal Reserve Bank Chairman Alan Greenspan and Secretary Treasury Paul O'Neill. Vicki Schmelzer, phone (212) 509-9269, email vschmelzer@marketnews.com