Interest rates will become “inevitably higher” as Japanese banks compete with foreign financial institutions following the nation’s “Big Bang” financial reforms, Koichi Kato, secretary general of the ruling Liberal Democratic Party, predicted April 13.

Kato, however, declined comment on the possibility of a hike in the Bank of Japan’s official discount rate, saying it is up to the central bank to make that decision. “The Big Bang has started,” Kato said at the Foreign Correspondents’ Club of Japan. “They (Japanese banks) have to be as competitive as foreign companies get customers. Through the Big Bang process, interest rates will get inevitably higher as financial institutions become more competitive.”

Concerning Prime Minister Ryutaro Hashimoto’s economic stimulus policy announced last week, Kato said he thinks income tax cuts will not have much effect in boosting the nation’s ailing economy. “I myself am of the opinion that income tax cuts may not be effective, but the prime minister decided to put about 4 trillion yen in tax cuts into the stimulus package,” Kato said. “Unless we recover confidence in the banking system or the future of Japan, the people will not spend much.”

On revising the Fiscal Structural Reform Law, Kato said that it is necessary to keep the cap on individual expenditures and that postponing the target year from 2003 to 2005 is acceptable.

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