TOKYO STOCK PLUNGE COULD FORCE EASIER MONEY POLICY
  Plunging Tokyo stock prices will prevent
  the Bank of Japan from raising its discount rate and could even
  force it to ease monetary policy if the collapse continues,
  government and private economists said.
      A rise in interest rates now would only serve to spark
  further selling of shares that could ultimately have a major
  deflationary impact on the real economy, they said.
      Although Bank of Japan officials have consistently
  maintained that they had no plans to raise the 2.5 pct discount
  rate, many in the markets have thought otherwise. 
      Fears of a rise in the discount rate were fanned by the
  central bank's apparent decision last week to countenance
  higher rates on commercial bills, dealers said.
      But today's stock market collapse -- prices fell nearly 15
  pct -- means that the Bank of Japan would be hard pressed to
  raise the discount rate now, despite its concerns about a
  renewed outbreak of inflation, dealers and economists said.
      Japanese government bond prices rose sharply today as the
  markets concluded that the stock market's collapse precluded
  the central bank from carrying out the widely-rumoured discount
  rate increase.
      A senior government economist suggested that both the U.S.
  And Japan needed to ease monetary policy now to prevent a
  further drop in New York and Tokyo stock prices. "They need to
  support the stock and security markets," he said.
      But Bank of Japan officials said they saw no need to change
  policy for the moment, although one admitted that the central
  bank may have to rethink its strategy if Tokyo stock prices
  continue to plunge during the rest of the week.
      Both government and Bank of Japan economists agreed the
  economy is better placed now to cope with the deflationary
  impact of plunging stock prices than it was a few months ago.
      With the economy recovering strongly, the steep drop in
  stock prices is not likely to put a major dent in consumer and
  business confidence, one government economist said.
      "There will be some impact on the real economy, but it won't
  be that big," said another.
      Individuals are not heavily invested in stocks on their
  own, although they do participate through trust funds and other
  investment vehicles. And while many manufacturing firms turned
  to financial market investments for profits during last year's
  economic downturn, the recent rebound has allowed them to
  refocus their attention on their core businesses, he said.
      Paradoxically, it is the pick-up in the economy that is
  partly to blame for the stock market collapse as companies have
  shifted funds away from financial investments to increase
  inventories and step up capital spending, one government
  economist said.
      In deciding what response to make to the steep stock price
  drop, the Bank of Japan must first determine whether prices
  will continue to fall further and then decide if they pose a
  greater economic danger than the threat of higher inflation,
  one central bank official said. "That will at least take a
  couple of days, if not weeks," he said.
  

