Newspapers and Bank of Japan Are All Wrong About Bad Loans

["Charles Jannuzi" <jannuzi@xxxxxxxxxxxxxxxxxxxxxxxxx>]

A relative who works for a healthy credit union in the US asked me, What's
your take on the bad loan problem that is supposed to be a crisis in Japan?

If I was trying to explain it in a simple analogy, I first came up with
this:

Imagine trying to help someone who has cut an artery by applying a bandaid
to the wound.

But this is not it at all.

Actually, the analogy is more like: Imagine trying to help someone who has
cut an artery by sopping up the blood on the floor with a towel.

The bad loans are merely an indicator of a depressed, deflated economy tied
to an over-valued currency. The problems aren't going to be dealt with by
'increasing consumption' or 'writing off the bad loans' (this always sounds
so harmless, but actually it means making banks and credit unions indebted
to the gov't while forcibly stripping them of any potential for future
profits should the economy actually turn up). Why in the hell should an
economy burdened with all this and growing non-performing loan portfolios
find a solution in making more loans? Who in the hell is going to borrow
more?   The Japanese economy has, in fact, undergone wave after wave of
restructuring during the era of the high yen. What it needs now, most of
all, is a reflated economy. If you take all the loans to all the businesses
out there sitting in the books of financial institutions, surely there are
some big corporate stinkers that deserve to be put out of their misery. But
as a totality, there are also thousands of small and medium size businesses
that are, by international standards, not that highly leveraged and with
viable business plans. These companies are going to be the key to any turn
around in the economy. It makes no sense to see foreclosing on them as the
solution to the problems. It just seals Japan's doom. This is Hooveresque
macroeconomic dictating when the microeconomics of banks, their analysts and
the thousands of companies they have relationships with are the key to
turning Japan around.

Here is an interesting article that supports my claim.

http://www.weeklypost.com/011105/011105b.htm#three

Newspapers and Bank of Japan Are All Wrong About Bad Loans



By Ryuichiro Matsubara, Professor of University of Tokyo

Business pages of the Japanese newspapers are devoting much space to report
on the issue of non-performing loans
of financial institutions. It is understandable because the bailout of bad
loans is the central core of Prime Minister
Koizumi's structural reform.

However, the contents of the stories are laughable. I am wondering whether
newspapers and the Japanese
government really have good understanding of the problem.

Nikkei Newspaper says, "Surprisingly enough, the nature of the problem of
the bad loans of Japanese financial
institutions has not changed over the last ten years since the problem
surfaced. Banks and financial authorities have
never understood it fully. Banks have sabotaged the write-offs of these bad
loans in their accounting books reflecting
the reality of the problem."

Asahi Newspaper says, "As long as fear exists in financial market and the
financial system stays malfunctioning, the
Japanese economy will not be able to get on the right track for recovery."

What these newspapers are missing is the fact that recession occurs when
supply exceeds demand in the economy,
which eventually causes bad loans by the banks. Therefore, if the government
leaves the situation of shortfall of
demand against supply, the bad loans will keep increasing.

The only solution for the problem is to bailout bad loans up to a level that
will not cause a financial crisis. Demand has
to be increased.

What Asahi Newspaper is saying is if banks make loans to businesses and they
invest for assets, their sales of the
invested assets and products will be sold well.

The Bank of Japan increased the money supply and is pressing banks to make
more loans to businesses. However,
demand is low and products are not selling well, which creates higher
inventory. Investment by business corporations
do not generate any return, which creates more bad loans.

What newspapers are doing by printing their articles on bad loans is helping
to increase the number of bad loans.

The Japanese government is stressing that increasing supply is the basis for
structural reform. That is wrong. It only
causes a bad cycle from excessive supply, deepening the recession and
causing more bad loans.

The government keeps saying that it is aiming at bailing out bad loans based
on a wrong understanding. The
government and the newspapers are all wrong.

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Posted by Charles Jannuzi