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Japanese firms split on moving from 0%.


We all know about the eternal game of guessing what the Federal Reserve will do in its never-ending battle against inflation. Until the last couple of months, those betting on rate hikes have been winning, with a ladder-like series of increases taking the Fed funds rate to 5.25 percent, from under 2 percent in 2004.

But imagine how those rates would play in deflation
Deflation
A general decline in prices, often caused by a reduction in the supply of money or credit. Deflation can be caused also by a decrease in government, personal or investment spending. The opposite of inflation, deflation has the side effect of increased unemployment since there is a lower level of demand in the economy, which can lead to an economic depression.
-challenged Japan, where rates had been pegged at zero for years until this past July, when the Bank of Japan lifted its zero-interest rate policy in line with price increases and signs of economic recovery.

Teikoku Databank, a research firm, polled Japanese firms about the move and found a lot of continuing angst over the notion of recovery. More than a third of the 9,852 responding companies said the lifting of the zero-rate floor was "too early," though about the same number deemed it "appropriate." Almost two-thirds of respondents said they still "do not feel the breakaway from deflation" in the Japanese economy.

Moreover, almost twice as many respondents expressed concerns that the burden of rising interest rates will adversely affect the upward trend of the economy than those that expressed no concerns.

When companies won't borrow even when interest rates are at zero, you wonder what it would take them to start borrowing (and growing) again. This bunker mentality seems to be an abiding concern that years and years of deflation seemed to have planted in the Japanese business psyche.
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Title Annotation:monetary policy
Author:Heffes, Ellen M.
Publication:Financial Executive
Date:Nov 1, 2006
Words:246
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