U.S. Fed switches to war mode

The Daily Yomiuri, Asia News Network, Tokyo

The U.S. Federal Reserve Board slashed interest rates for the first time in 11 months Wednesday, by half a percentage point.

The Fed appears to be gearing up in monetary terms for the possible impact of attacks on Iraq the administration of U.S. President George W. Bush is planning following his Republican Party's sweeping midterm election victories.

As for the U.S. economic outlook, the Fed suggested that the economy is about to slow down as the increasing possibility of a U.S. attack on Iraq poses an economically risky factor, using the phrase "heightened geopolitical risks."

The 0.5 point interest rate cut, which went beyond market projections, was intended to prevent the possible attack from slowing down the economy, the Fed said. Yet, a number of recently released indexes show the U.S. economy actually is slowing down.

In September, consumer spending, which has been supporting the U.S. economy, marked its first decline since November last year. In October, the consumer confidence index and the index of business activity, which shows growth and contraction in manufacturing, deteriorated, and the unemployment rate went up for the first time in four months.

U.S. businesses started avoiding risks, such as making capital investments and employing new workers, and this trend began to have an adverse effect on consumer behavior.

Whereas real economic growth marked an annualized rate of 3.1 percent from July to September, it is projected to significantly decline in the October-December period.

Not a few analysts claim, however, that the latest interest rate cut is unlikely to stimulate the economy as much as expected as the action was taken following last year's series of 11 interest rate cuts, which has already reduced U.S. interest rates to their lowest level in 40 years.

To enhance the stimulating effect of the Fed's rate cuts, the Bush administration is expected to swiftly implement fiscal and tax stimulus measures, including tax cuts on investment designed to reinvigorate the stock market, in addition to the large-scale tax cut program that is under way.

But not only U.S. and Japan, also European nations, centering on Germany, have begun showing economic slowdowns.

To prevent the world's leading countries from falling into deflationary trends, we urge Japan and European countries to make concerted efforts with the U.S. to promote economic stimulus measures in both fiscal and tax aspects. Japan, which has been a drag on the global economy, bears a heavy responsibility.

At the end of October, the government came up with a package of antideflationary measures, which centered on the acceleration of bad-loan disposal, yet stopped short of incorporating specific policies to overcome the economic crisis.

Tokyo is still unaware that a prerequisite to the accelerated disposal of nonperforming loans is to halt deflation as soon as possible. It decided not to submit supplementary budget bills to the extraordinary Diet session and postponed drawing up tax cut plans until next month.

The administration of Prime Minister Junichiro Koizumi can no longer shirk its duty to get out of the deflationary spiral, not only at home but also abroad.