Japan

["Ian Murray" <seamus2001@xxxxxxxxx>]

< http://www.feer.com >
Buying Time
Japan's latest emergency package doesn't tackle deflation, but
it may avert a financial crisis
By David Kruger/TOKYO
Issue cover-dated March 14, 2002


THE JAPANESE GOVERNMENT'S latest package of emergency measures
to prop up the ailing economy will not meet its goal of reining
in the crippling deflation afflicting the nation's battered
companies and debt-paralyzed banks. But it will likely help
prevent a financial crisis from erupting before the end of the
financial year on March 31. "I think it's highly effective, I
just think it's misnamed," says Ronald Bevacqua, an economist at
Commerz Securities in Tokyo. "It's not a deflation policy, it's
a stockmarket-support policy."

The package, titled "Emergency Countermeasures to Deflation,"
was presented on February 27, one week after Prime Minister
Junichiro Koizumi told United States President George W. Bush he
would "never slacken" in his drive for structural reform. But
analysts say the package shows Koizumi, whose hold on power has
been weakened in recent weeks as his public-approval rating has
plunged, is unwilling to deal head-on with the massive and
politically sensitive bad loans at the heart of Japan's economic
malaise. "This plan buys them time," says Bevacqua. "That's all
it does."

The package sparked a rally in the Nikkei 225 stock index by
tightening restrictions on margin trading and short-selling of
stocks, which is when investors sell a borrowed stock expecting
to be able to buy it back at a lower price at a later date. By
keeping stock prices high the government eases the pressure on
banks, which hold huge amounts of stock and have traditionally
counted on those holdings to boost profits.

But this has nothing to do with deflation, which has been eating
away at the Japanese economy for almost three years. The
nationwide consumer price index fell 1.4% in January from a year
earlier. Prices in Tokyo fell 1.7% in February, marking 30
months of continuous decline. Bankruptcies have soared in recent
months sending the unemployment rate higher and damping consumer
spending, forcing companies to cut prices to attract customers.
Some economists fear this series of events could spiral out of
control if action is not taken to break the chain.

But on two key issues the latest package proved a rehash of
often-stated positions. The government said it would continue to
push banks to deal with their bad-loan problems and would
"implement specific and effective measures in a bold and
flexible manner" to prevent a crisis. Koizumi and his ministers
have been repeating this vague statement since the start of the
year, vowing to take all necessary steps to avoid a financial
crisis should one appear imminent.

NOT ENOUGH BITE
Many analysts had hoped this package would provide those steps.
Bad loans at Japanese banks totalled ¥36 trillion ($270 billion)
at the end of September, according to the Financial Services
Agency. That was up ¥3.2 trillion from six months earlier even
though banks wrote-off soured debts. The package "lacked any
real measures" to deal with the crisis, says James Fiorillo,
senior banking analyst at ING Barings in Tokyo. "Building up the
momentum to put such policies and packages in place takes time,"
says Fiorillo, who downgraded his outlook for the industry on
February 27. "It probably means that there's going to be some
time before there's another attempt."

Meanwhile, the government is counting on the Bank of Japan to
prevent a crisis. Pressure has been building for months on the
BOJ to ease monetary policy in the hope that this will spark
inflation and encourage consumers to start spending. On February
28 the BOJ said it will increase its buying of government bonds
to ¥1 trillion a month from ¥800 billion to boost market
liquidity. But analysts say the move will have little impact, as
the market is already awash in funds.

BOJ Governor Masaru Hayami has consistently said that monetary
policy alone cannot solve Japan's problems and has urged the
government to push reforms that would clean up the banks. "The
government should decide to inject taxpayers' money into banks
quickly to stabilize the entire system," he told reporters on
February 28.

The Financial Services Agency is now conducting a special
inspection of the banks that are to be completed this month.
Yasuhisa Shiozaki, a Liberal Democratic Party MP, supports a
bank bailout and says Koizumi hasn't acted thus far because he
lacks the data needed to assess the problem-but the agency's
inspection may change that.

"Toward the end of March there should be some major changes of
policies towards financial issues," Shiozaki says. "Something
must be done and something will be done. But I'm not sure
whether it will be enough or not. Probably it will not. That
means we have to keep muddling through."