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Monday, Nov. 18, 2002

JAPANESE PERSPECTIVES

Reality check in order for 'antideflation' plan


The comprehensive package of so-called antideflation measures spelled out by the government late last month incorporates steps for revitalizing Japan's financial and industrial sectors, stimulating economic activity and bolstering the safety net for workers.

Among other things, the package included a program aimed at settling the bad loan problem by the end of fiscal 2004. This program calls for more strictly assessing banks' assets, beefing up their core capital, and introducing tougher standards of corporate governance.

It also proposes the creation of a new industrial revitalization body that would buy bad loans from financial institutions to support companies with valid prospects for rehabilitation.

These steps are of course welcome, but there are two points that must be kept in mind when the measures are put in place.

First, close attention must be paid to the severe realities of the Japanese economy when the financial revitalization program is actually carried out.

Efforts to accelerate bad-loan disposal, if pursued the wrong way, could merely prompt banks to reduce lending, thereby triggering an excessive number of corporate bankruptcies and exacerbating unemployment.

In the government's latest package, decisions on specific rules for calculating deferred tax assets, part of banks' core capital, and related tax measures were put off. A concrete timetable for those decisions is expected by the end of this month, and the government must come up with a realistic program that will help stabilize the financial system.

Second, the government is required to do more to stimulate the economy and overcome deflationary pressure.

The volume of outstanding nonperforming loans continues to rise, even though Japanese banks have already disposed of more than 80 trillion yen' worth. This is because loans are perpetually souring along with the slumping economy and asset deflation.

Japan's average nominal GDP growth over the past decade stands at a mere 0.5 percent, and average net profit at Japanese firms has fallen to about 80 percent of what is was in the 1980s. Land prices in the commercial districts of major cities have declined to roughly one-sixth their peak.

Unless something is done to correct the situation, new bad loans will continue to emerge and there will be no end to these ongoing woes. The government needs to spell out drastic reforms in securities and land-related taxes as well as budgetary steps to promote urban redevelopment.

The Bank of Japan, meanwhile, must work further together with the government to counter deflationary pressures. True, the central bank has taken steps to pump more money into banks' current accounts and purchase stocks held by financial institutions, but all of that now appears to have been little, too late.

Various ideas have been floated on further monetary easing, including inflation targeting and the purchase of foreign government bonds. The central bank should shun any prejudices and examine the feasibility of these proposals -- and implement them as fully as possible.

Yoshio Nakamura is a senior managing director of the Japan Business Federation (Nippon Keidanren).


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