The outcome on both fronts, however, remains in doubt. Contrary to the Japanese government's forecast for a upturn in the economy, the International Monetary Fund predicts no growth at all this year. The Organization for Economic Co-operation and Development (OECD) is even more downbeat. It sees Japan’s gross domestic product declining by 0.3%. And Japan experts, such as Harvard professor Ezra Vogel, say the world will have to wait five years to see an end to the sluggishness that has paralyzed Japan's economy in all but one of the past six years. Japan's financial authorities have, at least, started moving towards a new openness. Bank of Japan governor Masaru Hayami, or example, now calls the banking problem 'severe'. Four years ago his predecessor, Yasushi Mieno, went around assuring foreign bankers that the bad loan problem was 'over the peak'.After years of pretending that banking problems were under control, Japan's financial authorities have finally injected taxpayers' funds into a financial rescue program and packaged 16.7 trillion yen(about U5$128 billion) in stimulants to reverse a worsening recession.
The Finance Ministry, which until January had said Japan's banks held only 21.7 trillion yen in bad loans, suddenly acknowledged that what it called 'problem loans' amount to 76.7 trillion yen. And this excluded bad loans reported by 4,000 smaller banks before the announcement brought the total to 83 trillion yen, or 16% of last year's GDP.
And after the collapse last November of one of Japan's largest banks, Hokkaido Takushoku Bank, and its fourth largest securities firm, Yamaichi Securities, the finance ministry stopped insisting that Japan’s banks could get back on their feet by themselves and drew up a 130-trillion yen infusion of taxpayers' money to resuscitate them.
Prime Minister Ryutaro Hashimoto, for his part, abandoned an austerity program he launched last year and approved a new package of stimulants that are supposed to create 16.7 trillion yen worth of new economic activity. Critics, however, remain skeptical that any of the government measures will clean up the banking mess, which increasingly is being identified as Japan's top problem. In a testimony to a United States Senate committee, Alan Greenspan, chairman of the Federal Reserve Board,declared that 'until we...see a viable financial system functioning, it's going to be difficult for [Japan] to be an engine for Asian progress.'Seiroku Kajiyma, an influential ruling Liberal Democratic Party member of the lower house of Parliament, and who served as Hashimoto's chief cabinet secretary until last fall, criticized the infusion of taxpayers’ funds for failing to do anything to reduce the mountain of bad loans, which he estimated at 110 trillion yen, or 22% of last year's GDP.
Under the Bank of Japan‘s 34-month-long ultra-low interest policy, banks have been handed money virtually free of charge. Yet they still have not raised profits to anywhere near the level of their American competitors according to David Asher, an Oxford University Japan scholar, and Andrew Smithers, chairman of London economic consultancy Smithers and Co. In a recent report on Japan, they said the new commitment of taxpayers' funds amounts to 'nothing more than another delaying strategy’.
In late April, the 19 largest banks release documents that showed they wrote off 10.34 trillion yen in non-performing loans in fiscal 1997. That sum, however, amounted to less than a fifth of the banks' combined problem loans - a strong indicator of a long road ahead towards final disposal of the bad loans.
In addition, banks have not yet sold untold billion of dollars worth of properties they hold as collateral for the bad loans they have written off. Hashimoto's new pump-priming package will address this problem for the first time by offering government intervention to unclog the back log of unsold collateral properties But how effective it will be remains to be seen.
Meanwhile, the Bank of Japan’s suppression of the central discount rate to 0.5% continues to sap consumption from depositors deprived of even average income on their savings and helps sustain a cheap yen that has ignited a bonanza for Japan's robust exporters.
Forecasting remains a dart-throwing game. 'We concluded that the long-term prospects for growth are poor. A large portion of Japan's considerable wealth and economic potential stands to be frittered away by misguided economic policies in the coming decades, just as in the 1990's,' Asher and Smithers wrote in their report entitled Debt, Deflation, Default, Demography and Deregulation.
They called for the government to take over failing banks, eliminate bad loans from their books and sell their assets – essentially what a new law that took effect on April 1 empowered the finance ministry to do. But, with an election for the upper house of Parliament in July, the ministry, has not spelled out what it intends to do.
Jesper Koll, a JP Morgan economist, predicts a vicious cycle. Bankruptcies will raise the amount of bad loans crippling the banks. Banks, in response, will tighten credit, forcing more bankruptcies. Unemployment will produce another round of bankruptcies. Risks of a self-reinforcing deflationary cycle remain high, Koll says.
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Added June 8, 1998
