FINANCIAL TIMES, Wednesday, February 9, 2000

From Mr. Richard A. Werner.

Sir, Your editorial comment, "Fiscal crunch", February 4, has no praise for the decision by the Japanese finance ministry to borrow from banks instead of using bond issuance. I think you should reconsider your position.

No doubt Japan's recession has been prolonged by the lack of bank credit creation, and a central bank unwilling to step in and create extra money. I have been urging the ministry for quite a while to simply reflate without the central bank - namely by stopping the issuance of government bonds and instead funding the public sector borrowing requirement via bank loans. Credit creation in the economy would soar, and economic growth would recover sharply.

Moreover, fiscal policy would suddenly become effective, unlike the dozen stimulus packages of the past decade. Fiscal policy funded by bond issuance to investors cannot stimulate growth, as it merely reallocate existing purchasing power. Investors who buy Japanese government bonds (JGBs) have to pull their money out of other investments, such as corporate bonds and lending to small firms. It is a zero-sum game. But fiscal policy funded by borrowing from banks suffers from no such crowding out, as total credit creation in the economy increases. It is a positive-sum game. Sure, there will be losers: brokers, including foreign ones, will lose some fat JGB underwriting fees.

But if we want to increase national welfare by raising economic growth, we cannot help but praise the ministry of finance's plan.