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Top Financial Expert Says Japan's Interest Rates Must Rise

A top finance expert says Japan's interest rates need to rise more. Eisuke Sakakibara also says international stock markets may remain volatile over the next few weeks, after this week's sell off. Yuriko Nagano reports for VOA from Tokyo.

One of Japan's top experts on international monetary policy says his country needs to raise interest rates more aggressively.

Eisuke Sakakibara is an economics professor at Waseda University and former vice minister of finance. He is known at home and abroad as "Mr. Yen" for his efforts to steady the currency's sharp movements in the 1990s.

He says that Japan's low interest rates in the long run are bad for the economy, in part because many retail investors are risking their savings by seeking higher returns overseas, instead of investing at home. That keeps the yen weak.

In a speech Friday, he said the Bank of Japan might try to raise rates again in May, before elections for the upper house of parliament.

Even after a recent increase, the country's main interest rate is 0.50 percent. That contrasts with the benchmark U.S. rate of 5.25 percent.

Sakakibara indicates he thinks the government of Prime Minister Shinzo Abe is discouraging the Bank of Japan from raising rates."(The)Abe government thinks that this low interest rate environment is good for their growth policy," he explains. "So, they are not concerned at all about the 'carry trade,' which is a major problem with this government."

The carry trade is the practice of borrowing in yen to invest in another country where returns are much higher. There are estimates the carry trade could total more than $340 billion.

The United States and European Union are pressing Japan to let interest rates rise to reflect the health of the country's economy and to strengthen the yen. A weak yen makes Japanese exports relatively cheap in world markets.

In addition, some experts warn that such huge flows of money could be destabilizing to international financial systems, if there is a sudden halt or shift in the trade.

The Bank of Japan has kept interest rates hovering at zero for several years, as part of an effort to halt deflation and halt an economic slump that began in the early 1990s.

Sakakibara predicts that this week's stock market turbulence, which originated in Shanghai, will continue for a few more weeks. Most world stock markets fell sharply after Shanghai's main stock index lost nearly nine percent on Tuesday.

He says that given how high the Chinese and Indian equity markets have risen, a sell-off was predictable. But the economist does not see a meltdown coming, since both countries are experiencing strong economic growth.

He said that uncertainty over the U.S. economy also spooked investors.