For all the controversy surrounding the Bank of Japan’s much- anticipated move to raise rates for the first time in a decade, more troubling than the actual rate hike was the denial of reality evident in the bank’s rationalization for the action. “The [BoJ] feels confident that Japan’s economy has reached the stage where deflationary concern has been dispelled, the condition for lifting the zero interest rate policy,” the central bank said in announcing the decision. This “confidence,” however, is entirely without empirical foundation. Japan’s wholesale and retail price indices continue to fall, even as rising crude oil prices mask the true extent of the deflation. Long-term JGB yields have hovered around 1.75% for the past year, a level that can only be explained by expectations for a continued price-level decline. The imposing obstacle to economic activity posed by persistent monetary deflation also is seen in the 4.5% year-on-year decline in aggregate bank lending, a measure which has had an unbroken run  spanning nearly four years in negative territory.

In itself, lifting the overnight rate target from virtually zero to 0.25% will have little practical consequence. The zero rate did nothing to actually ease the supply of yen liquidity relative to demand; a 25-basis point increase won’t materially “tighten” an already too-tight operational stance.  What the BoJ most needs is to deep-six the rate target as its policy instrument and adopt a liquidity-oriented regime that would act directly to terminate the yen’s deflation. The rate decision was probably most damaging in underscoring the degree to which the Japanese authorities continue to move away from embracing that objective. At a press conference following announcement of the central bank action, BoJ Governor Masaru remarked: “With this decision, I hope the public will have a brighter view of an improving economy and that market dynamism will be revitalized.”  That hope is likely to remain unfulfilled.

GORE’S GIFT TO BUSH: Supporters of the Bush-Cheney GOP ticket should hope that the campaign takes with the barest grain of salt today’s lead Wall Street Journal editorial,  “How Different?”  As their battle to reverse the electorate’s error in twice putting Bill Clinton in the White House ends in futility, the Journal essentially is encouraging the Bush camp to pursue an ethics/character campaign against Clinton’s hoped-for successor, Joe Lieberman be damned. Bad advice.  In fact, it will probably redound to Bush’s advantage to allow the Lieberman vp nomination to inoculate Gore on the character issue.  Bush has an appealing substantive agenda to take to the voters on taxes, social security, tort reform and free trade. Gore-Lieberman has paying down the debt. The less Bush gets distracted by the Gore ethics issues, the better off he’ll be. If he’s inclined otherwise, he might be advised to recall Bob Dole’s famous victory cry in ’96, “Where’s the outrage?”