By Anne D. Picker, International Economist,Econoday
Monday, July 2, 2001

With the second quarter now history, all of the equities indexes followed here improved from the first quarter with the notable exception of the Nikkei. The other four indexes in Asia are above their first quarter finishes. The three indexes in Europe and Britain we follow improved modestly in the second quarter though they continued to be hit by declining earnings. In North America, the Dow, Nasdaq and Toronto Stock Exchange Composite 300 cut their losses although they remain in negative territory on the year, while the Mexican Bolsa improved upon its already positive first quarter reading. (See specific areas below for details.)

The Federal Reserve lowered interest rates yet again - but this time by only 25 basis points to 3.75 percent on the key federal funds rate. While still concerned about the weak economy, the FOMC needs to assess the impact of earlier interest rate reductions as changes in monetary policy can take as long as a year to work their way through the economy.

But the Bank of Japan chose to sit pat, preferring to wait until more details of the government's restructuring plans are known. The BoJ maintained its target on excess reserves it holds for banks and left its key policymaking interest rate unchanged at close to zero. The Nikkei and the yen fell as the unanimous decision signaled that the bank is unwilling to expand money supply by buying more bonds from investors or to raise the excess reserves target even as the economy worsens. The BoJ once again is under increasing political pressure to inject further liquidity into the weakening economy amid increasingly negative economic news. But the Bank continues to hold the government's feet to the fire, insisting that structural reforms are needed, not more monetary easing. When the Bank guided rates to near zero and raised the reserve target by one trillion yen in March, Governor Masaru Hayami said the onus was on the government to take the lead in pulling the economy out of an 11 year slump. He repeated that message again.

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