The West German government yesterday cut its discount rate by half a point to 3.5 percent in a move market observers expect will trigger similar actions by Japan's central bank and by the Federal Reserve Board here, accelerating a lower-interest-rate trend around the globe.
The German step, accompanied by a cut in the interest rate on short-term government bills from 4.3 percent to 4 percent -- which the Bundesbank said was the lowest in history -- ostensibly was designed to stimulate domestic economic activity.
But economist C. Fred Bergsten, director of the Institute for International Economics in Washington, said he suspects that an equal motivation was the Germans' desire to halt the steady appreciation of the deutsche mark, which, like the Japanese yen, has risen about 30 percent against the dollar in the past year.
The Netherlands also moved its discount rates down half a point, to 4.5 percent. A statement by the Dutch central bank said its move was "in agreement with similar measures abroad aimed at a continuing decline of the international interest-rate level, which is justified by declining inflation."
After announcement of the action by the Bundesbank, the dollar moved higher in most markets. It rose to 2.2466 West German marks, up from Wednesday's fixing of 2.2210 marks, but lower than the opening of 2.268 marks.
German businessmen, like their Japanese counterparts, have become concerned about the sharp appreciation of their currency since February 1985. The higher-priced yen and mark make Japanese and German goods more expensive, and thus less competitive in world markets.
In a meeting with Washington Post editors and reporters yesterday, Sony Corp. Chairman Akio Morita complained that the Japanese yen had appreciated too quickly against the dollar in the past year, arguing that an exchange rate of 200 yen to the dollar would be a reasonable "equilibrium" rate. The yen, which has been hovering at or below 180 to the dollar in the past few weeks, yesterday weakened to 180.95 to the dollar, compared with 179.30 on Wednesday.
Dealers in Tokyo said the sharp rise in the dollar was spurred by massive short covering by banks before the cut in the German discount rate, and by a hint from Bank of Japan governor Satoshi Sumita that Japan might follow.
West German officials conceded privately that the interest-rate action was taken in part because the government thinks the time has come for a "pause" in the sharp appreciation of the mark.
But one official said the primary reason was to boost the economy.
"We also have a government that also wants to win elections," he said. The next federal government election in West Germany will be in January.
American government officials, on the other hand, have been calling for a further decline in the dollar as a means of reducing the U.S. trade deficit.
Bergsten said in a telephone interview that "it would be premature to interrupt the correction" of the dollar against the yen and mark.
In a speech Tuesday in Peoria, Ill., Treasury Secretary James A. Baker III said that the 30-percent decline in the dollar is "good news," and predicted that the trade deficit, as a result, will "shrink by the end of this year."
But Baker passed up the opportunity to repeat, as he had in congressional testimony in the past couple of weeks, that a further decline would be welcome.
He added that the current system of floating rates "remains valid" but, in view of exchange-rate volatilty over the past 15 years, "We think it's worth considering whether some innovations might be made to encourage stability in the international monetary system."
Treasury officials have been anxious to see moves to stimulate economic growth in Japan and West Germany.
If Japan follows the German discount-rate cut, it would make it feasible for the Federal Reserve to cut the U.S. discount rate, which has been at 7.5 percent since May 1985.
This will act as a stimulant to the U.S. economy, and also lower short-term rates, providing a tonic to Mexico and other hard-pressed Third World borrowers.
Fed Chairman Paul A. Volcker reportedly has been reluctant to push interest rates lower, fearing a further decline in the dollar that might touch off new inflationary pressures.
But if the interest rates of West Germany and Japan move down, tending to stabilize or even strengthen the dollar, the Fed is likely to feel safe in cutting the discount rate.
The expectation in financial markets is that the Japanese central bank will cut its discount rate by a half-point, to 4 percent, this afternoon.
But Bergsten said he had heard rumors that Japan might cut the rate a full point to 3.5 percent, and then add another half-point cut before the Tokyo economic summit in May.
Announcement of the lower German interest-rate pattern provided a renewed boost for the American bond market, which had lost some of its sensational momentum on Wednesday, when traders worried that the German central bank might not go ahead with the expected discount rate cut.
Both long-term and short-term Treasury securities rose in anticipation of Fed action on the U.S. discount rate.