Japan slashing rates to make money 'free'
Daring experiment seen as last resort to recharge economy
By Michael A. Lev Tribune Foreign Correspondent
TOKYO--In its battle against recession, Japan is trying something that has never been attempted in the history of modern economics: Policymakers are slashing interest rates so drastically they have effectively reached zero.
Free money, in other words.
It is a phenomenon that fabled economists like John Maynard Keynes hinted at in their writings, conjuring up colorful terms like "pushing on a string" to describe one potential effect.
But financial gurus never expected they would have to deal with the concept outside of a classroom, because it seemed too bizarre and unlikely an event to occur.
"We never really thought they'd go to zero," said Brad DeLong, and economist at the University of California at Berkeley who is a former Treasury Department official. "We always thought 1 percent or a half-percent. We thought banks woudl have to offer you something to keep your money in the bank rather than buried in a mattress."
An interest rate of zero does not violate any basic principle of economics. It simply has not been tried by a government before. And its real-world impact -- on borrowers, depositors, banks and markets -- isn't understood.
The basic idea is that after a decade of poor economic performance, with the economy actually shrinking for the last two years, Japan's policymakers have run out of other options for reigniting growth. So they are trying a radical experiment to spur spending and investment.
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