Japan, U.S. must try to avert economic crisis

TOKYO: The Federal Reserve has cut interest rates by half a percentage point, a move that comes after two half-point cuts in January. This marks the third such reduction in the central bank's benchmark federal funds target rate for overnight loans among banks this year.

The Fed's latest move follows the Bank of Japan's decision on Monday to adopt a quantitative monetary-easing approach, which has effectively revived the zero-interest-rate policy.

These measures taken by Japan and the United States represent a joint effort to stop the current simultaneous fall in stock prices worldwide and contain the confusion in the world economy.

However, the U.S. market appears to have been unimpressed by the Fed's latest move, as shown by the two-year low recorded on the New York Stock Exchange on Tuesday, when the central bank announced the third half-point cut this year. This is in stark contrast to trading in Tokyo on Wednesday, when the Nikkei Stock Average rose sharply, indicating favorable market reaction to the Bank of Japan's recent announcement.

The less-than-satisfactory reaction in the New York market was in marked contrast to the significant rise in U.S. stock prices following the Fed's two half-point cuts earlier this year. This shows there is a limit to what the Fed can accomplish through its monetary policy.

The difference in reaction to the interest rate cuts also points to the U.S. market's wavering confidence in Fed Chairman Alan Greenspan, who has played a central role in expanding the U.S. economy through monetary policies for close to 10 years.

Earlier, Greenspan sought to ensure a soft landing for the U.S. economy, targeting mild growth without greatly disturbing what appeared to be an overheating economy. To accomplish this goal, he implemented each necessary monetary policy in a timely manner, in line with his perception that U.S. stock prices were higher than they should be.

Since autumn, however, the Fed has been unable to choose the right moment to ease its monetary policy. The economic bubble created by soaring stock prices of high-tech businesses has all but burst. All this has served to brake growth in corporate performance and personal consumption.

Today, the U.S. economy appears to be about to slow down rapidly. It looks as if the United States acted too late in seeking to ensure its economy made a soft landing.

The two half-point cuts in January, which amounted to a significant one percentage point reduction, have done little to reverse the tide. During testimony before the U.S. Congress in February, Greenspan signaled that there was a limit to what the Fed's cuts in interests rates could achieve. He said the U.S. economy still faced "downside risks" out of sync with its sustained growth, even after the two interest-rate reductions.

In a statement issued along with its latest decision, the Fed said it was prepared to implement further, flexible cuts in interest rates. However, there still is more to do in this regard.

The U.S. administration is seeking a consensus with Congress over a plan to front-load a large-scale tax cut initially pledged by President George W. Bush for fiscal 2002. We hope the U.S government and Congress will cooperate in shoring up the economy by implementing fiscal and tax measures as soon as possible.

For its part, Japan should promptly carry out necessary steps, including a plan confirmed by Prime Minister Yoshiro Mori during recent talks with Bush to write off -- once and for all -- nonperforming loans held by Japanese financial institutions.

The government should also implement its recently announced emergency economic stimulus package, including measures to resuscitate the faltering stock market. All this would complement the Bank of Japan's quantitative-easing stance.

However, the government remains unsure about what kind of specific steps should be taken in its struggle to resolve the bad-loan problem. Some politicians reportedly are aiming to ensure the government sets a mid-April deadline to draw up concrete measures for the economic stimulus package.

Admittedly, stock prices in the Tokyo market have shown an upturn. However, this country still faces the threat of a deflationary crisis. No time should be wasted in taking measures to avert such a scenario.

-- The Yomiuri Shimbun