No.34,Summer.2001
Editor:Tsutomu Uwagawa | ||
Address:Rodo-Soken,Union Corp 3-3-1 Takinogawa,Kitaku,Tokyo,Japan(114) | ||
Tel:03(3940)0523 | Fax:03(5567)2968 | E-mail:HZI01762@nifty.ne.jp |
Problems of "Emergency Economic Package"
By Kenji IMAMIYA
In response to the U.S. Strong Demand
First of all, I want to speak of my impressions about the Japanese government's "Emergency Economic Package" published on April 6 in two points.
One thing is that the government drew up this economic package under an intense pressure from the United States. Some say that the new U.S. administration under President Bush is not so coercive toward Japan as the former Clinton administration. There was, in fact, a report saying that in the G7 finance ministers and central bank governors meeting held in Palermo, Italy, on February 17, Japan was not criticized very much. Behind the appearance, however, an immense pressure was put on the Japanese delegation. The G7 statement, recognizing the necessity of Japan's economic recovery, calls on Japan to further easy-money policy and strengthen the financial sector. The behind the scenes, it is said, the US Finance Ministry was pressurizing Japan, stubbornly demanding Japan should accept a structural reform which included the immediate write-offs of banks' bad loans to help increase U.S. direct investment in Japan.
This is obvious when you look at the moves of the Japanese government. On February 16, Financial Service Agency Minister Haruo YANAGISAWA publicly spoke of a policy to encourage banks to directly write off bad loans from their books. After the G7 meeting, on February 20, he officially announced this policy. On 22, with the Tokyo stock prices falling below 130,000, the government brought to the fore the policy to increase stock prices in connection with the clean up of banks' non-performing loans. In this way, the Japanese government drastically changed its policy held since 1992 of promoting step-by-step the disposal of bad loans of financial institutions.
The U.S. pressured Japan to accept its demand so strongly because: 1) it considers its relations with Japan in terms of U.S. security, as part of U.S. world strategy; 2) U.S. economy was rapidly aggravating; and 3) it wanted make Japanese market further accessible for U.S. financial institutions. Under an inexorable pressure from the U.S., Japan's newborn Koizumi cabinet will most likely to implement the emergency economic package to a maximum degree.
Another thing that drew my attention was a pressure against free speech in this regard. An article entitled "Horrible personnel management of Nihon Keizai Shimbun Inc.," published in Weekly Asahi of April 27 unearthed the problem. The article said that on March 10, the following day of the announcement of an emergency economic package as a government draft by the Liberal Democratic Party, the Komei Party and the New Conservative Party, The Nihon Keizai Shimbun carried an editorial entitled Emergency Package amid Confusion. The editorial pointed out the proposed emergency package, hastily and therefore poorly made, failing to clarify who was in charge to implement it. It went on to say that the proposed package proved to be a mere remedy for prolonging the life of the Mori cabinet. Takuhiko Tsuruta, president of the Nihon Keizai Shimbun Inc. (Nikkei) was infuriated at the article, and demoted the editorialist who wrote it to the Nikkei Research Institute of Industry and Markets, said the Weekly Asahi. The Weekly Asahi also reveals a phone call from Shizuka Kamei; the then LDP chairman of the Policy Research Council, to Tsuruta was the trigger to this incident. The truth remains unknown, but such an oppression of free speech taking place with regard to the economic package makes, so to say, a symbol of Japan's staggering economy, and I think this is a very dangerous trend.
Contents of the Package
Now let me get onto the main subject. First I'll explain the contents of the government's economic package. The package has two chapters; the Chapter II, which puts forward specific measures, should be of our chief concern. The Chapter II is composed of five parts: 1) Revitalization of the Financial and Corporate Sectors, 2) Structural Reform n the Securities Market, 3) Urban Revitalization and Increasing Liquidity in Land Assets, 4) Creating Jobs and Enhancing the Safety Net for the Employed Workers, and 5) Tax System. The time is limited, so today I will focus on the part one. Part one is made up of two sections; the section one refers to the integrated resolution of the problems of non-performing loans of banks and excessive debt of corporations, and the section two deals with the limitation on shareholdings of banks. In short, the part 1 treats as important two questions. One thing is how to push forward the write-offs of banks' non-performing loans, and another thing is how to set up a stock-buying body.
Looking into the part one it is features by two points regarding the ways to be applied to getting rid of bad loans. First is the promotion of direct disposal of bad loans within a definite period of time. Second is the stretched interpretation of the Law on Special Measures for Industrial Revitalization, which allows it to be applied to the cleanup of non-performing loans. It set a time limit for those already classified as bad loans at within the next two fiscal years, and for those newly classified as such at within the next three fiscal years. According to the calculation of Tokyo-Mitsubishi Securities, an average of seven trillion yen a year is in non-performing loans produced for these three years. In fiscal 2000 ending September alone, about 3.6 trillion yen were added to the existing bad loans. Anyway, we never know exact amount of bad loans, because banks have not disclosed the details fully. The Nihon Keizai Shimbun of April 16 reported that the government had started considering mandating banks to disclose such details.
About the limitation on banks' shareholdings, two points characterize the package. One is a limit on the gross amount of stockholdings by banks. The package says that framework should be created to limit banks' stock holdings within the range of banks' ability to manage risk, for example, to the equivalent of the bank's capital. Another is to set up a stock-buying body. Named provisionally the Bank Equity Purchasing Corporation (BEPC), the body will not buy shares of all industries but exclusively of banks'. Involvement of the Deposit Insurance Corporation of Japan and other support from the public sector such as a government guarantee to funding BEPC's share purchases will be considered. The package says that to determine a concrete plan to establish this system, a detailed final plan including legal schemes required will be developed, which leaves room for a government support, that is, investment of tax money to bail out the loss in share-purchasing.
That's the main point of the government economic package about revitalization of finance. I want to mention briefly the difference between this package and the ruling coalition parties' plan published on March 9. The Emergency Economic Package is much the same as the ruling-parties' policy in the basics, but has various points added to it. From the outset, the ruling parties' policy was very simple, roughly made. Based on this policy, the government and ruling coalition parties convened the first meeting of the emergency economic measure headquarters. After the meeting, government hammered out a series of plans, which were quite different in many respects from the Emergency Economic Package. For example, the former plans defined that a stock-buying body should not exist more than five years; the purchasing fund should be covered by emergency loans from the Bank of Japan and government guaranteed bonds; and one third of the investment in the body should be provided by the government. All these do not appear in the Emergency Economic Package, but referred to only as subjects to be examined. There was such a vast difference in opinions on these points that they failed to have an agreed conclusion.
Characteristics of the Package
Now let us go into the characteristics of the package.
First, its contents are substantially different from the previous ones; the government had implemented more than 10 emergency packages since 1992, when the bad loan problem came to the fore. The former packages contained measures centered on public works with budgetary means, which is not the case with the latest one. However, to deal with the disposal of non-performing loans, one should grasp properly the relationship between Japan's economy and such loans. Yet the package this time does not referred a word to it, and only pushes out how to write off them. This is a distinctive character of the package.
To put the question of bad loans disposal on the agenda, the government must make clear the relationship between Japan's economy and such loans. Yet the government package this time does not refer at all to this question, but only pushes for bad loan write-offs. This is a distinctive character of the package.
In calling for the disposal of banks' non-performing loans, how to view their@connection with Japan's economic situation is essential. The government thinks that an enormous amount of bad loans have caused a decline in banks' lending, worsening as a result Japan's economic situation. It says this is why Japan has not been able to find a way out of the economic recession for so long, and that early disposal of banks' bad loans is urgent. But if you consider the matter carefully, to attribute the decline in banks' lending to their bad loans is an absurd argument. In a way, banks lend money because of needs from society, it has nothing to do with whether they have bad loans or not. In their recent book Trap of Japanese Economy (Nihon Keizai Shimbun, Inc.), Keiichiro Kobayashi and Souta Kato argue that banks are unable to lend money not because of debts but of bad loans. They say that bad loans have undermined trust in the network among corporations, thus prolonging the recession facing Japan. In other words, they do not see the process as bad loans causing diminish in lending to prolong recession, but as bad loans causing the lack of trust among corporations and this is how the economic recession continues. Anyway, they share the government's viewpoint to put Japan's long-drawn-out economic recession down to non-performing loans.
Should we really attribute the prolonged economic recession to bad loans? My answer is no, the reality is opposite. Obviously, the cause of the prolonged recession Japan has suffered since 1990s is the misgovernment of the LDP. Its reckless policy to waste huge money on public works has deepened Japan's fiscal crisis. Extraordinarily low interests rate paralyzing the financial market and plundering the people, increased burden imposed on the people by the consumption tax rate raise and reduction of social security, corporate restructuring based on wage cut and dismissals... All these are to be blamed for the present economic recession without a way out. Non-performing loans are the result. What is more, for these past ten years since the collapse of the bubble economy, the business circles and the government have not taken any serious measures to deal with bad loans. Had they made an earnest effort to resolve the bad loans problem, there would not have been such a huge among of bad loans as we have today. In this regard, we can say that the existing non-performing loans are not an aftereffect of the bubble economy but the consequence of the irresponsible, ineffective business management by major financial institutions and corporations over the last ten years. What is more, the government scheme of injecting 70 trillion yen to bail out banks of their bad loans has been of no use.
Second, as I have mentioned earlier, the package proposes direct write-offs of banks' bad loans from their books within a definite timeframe, leaving the details and actual situation of such loans untouched. There are three categories of bad loans: 1) risk-management loans based on the Banking Law; 2) self-assessed loans according to the early warning system; and 3) disclosed loans under the Financial Revitalization Law. As for risk-management loans, for the fiscal year ended in March 2000, 31 trillion yen are in such loans all over the country and major banks hold 19 trillion yen. Of these 19 trillion yen, 13 trillion are extended to debtors that went bankrupt and to loans with delayed interest payments. About 60 percent of those bankrupt debtors are real estate agents, building contractors; distribution and service businesses, most of whom are small and medium sized enterprises. Drastic, direct disposal of bad loans by banks from their books will inevitably lead to massive bankruptcy of those small- and medium-sized enterprises. And there is no ground for the government's hurrying up the direct write-offs of banks' loans. Since 1992, Japanese banks have written off approximately 98 trillion yen have been written off in non-performing loans, and 80 percent of them, 54 trillion yen, were directly disposed of. It is an erroneous argument that little direct disposal of bad loans have been carried out.
Let me speak about the problem of direct disposal of banks' bad loans.
There are three ways of direct disposal: 1) by legal measures such as the Corporate Rehabilitation Law, Civil Reorganization Law and the like; 2) by debt forgiveness or debt cancellation; and 3) by selling bad loans such as securitization of bad loans. Any of these three ways will end up in the same result in three aspects.
One, reorganization of major banks and corporations will be accelerated further. Banks have been merged into four big groups, but no one knows for sure how the things develop from now on. Each bank will naturally throw itself into a fierce competition among them. But at issue now is the internal strife of the merged banks over the management and personnel affairs are becoming ever more intense. This goes for the banks' affiliated corporations as well. No doubt that the prompt write-offs of banks' non-performing loans will be used to help the realignment of corporations into big business groups. Combined with the industrial revitalization, corporate reorganization will be accelerated through dismissals, restructuring, tax reduction, loans at low interest, and Corporate Spin-offs Law.
Two, as I have mentioned earlier, small- and medium-sized enterprises, kicked out from of the corporate groupings, will be abandoned one after another. As a result, the very basis of Japan's economy may well be at stake.
Three, the sales of bad loans will make it easier for U.S. financial institutions to make their way into Japanese markets. Foreign capitals have already bought Japanese companies at a low price, and without doubt, there will be more and more such buying. So-called "vulture funds" are watching for chances to prey on Japanese markets.
Speaking of the third character of the government emergency economic package, I want to refer to the problem of a stock-buying body. This too, I have mentioned before, saying that the package remains very ambiguous on this issue because many different opinions were presented from the political and business circles. Why were there so many different opinions over the stock-buying body? Because it contradicts the "market-solve-it-all" theory, the government's fundamental principle. The contradiction is only natural, because the stock-buying body aims to artificially shore up the stock market, while advocating deregulation and liberalization. The package explains that the purpose of the proposed share purchasing schemes is not only to prop up stocks but also to help to stabilize Japan's financial system. But the outcome will be the same. Moreover, if the amount of shares big banks can hold is to be limited to the equivalent of the bank's capital, as proposed in the package, they will have to sell about 10 trillion yen in shares (in case of the bank's shareholdings stand at 45 trillion yen, and its capital, 35 trillion yen). Many questions will be raised; how to define the details of stock sales, what to do with the losses and profit from such sales, and so on. Masaru Hayami, Governor of the Bank of Japan, also stated that the proposed scheme has too many problems concerning ownership, responsibility of loss compensation, and the like. It is a matter of course that the scheme has met criticisms that it favors major corporations too much, or it is the waste of taxpayers'' money.
Problems of the Package
Now I will talk about the problems of the package.
First is the Japan's extraordinary subordination to the strong pressure from the U.S. is ever more visible.
Second, it is noteworthy at the same time that the LDP, in its own way, tries to cope with the change in the make up of Japan's economy in some respects. That is, the package, while dealing with the dissolution of Japan as a construction-company-oriented state, aims to establish a system different from the present one centered wasteful, large-scale public works to serve the interests of major general contractors. Yet the promotion of reorganization of the construction sector was included in the package, and it is a serious problem that the package intends to preserve the traditional system based on major general contractors though reorganization, though in different form. It is identical to the fact that the newborn Koizumi cabinet makes no difference in the LDP's make-up, even after its out-dated political constitution had exposed to a critical situation.
Third, the package is nothing but to serve the reorganization of large financial institutions and corporations as a useful instrument for the further strengthening of the system in favor of major corporations.
Fourth, if the measures proposed by the package are carried out, there will be more jobless people and business failures, which will worsen the already bad living conditions of people, aggravating the economic recession. In the end, Japan's economy as a whole will head for wreck.
In connection with this, I want to speak briefly about the Bank of Japan's policy of quantitative easing of credit. Without this credit easing policy, the emergency package cannot be implemented. This is the first time for the BOJ to carry out the quantitative easing easing, which has three purposes: 1) to make it possible to provide as much funds as required; 2) to create incentives for corporate investment by setting time limit for the implementation of the policy, which is until consumer prices turn to rise; and 3) to create conditions for generating inflation. None of these purposes can help to improve the people's living conditions.
To conclude, I would like to present my view on what economic measures are needed to serve the people's interests. As we have little time left, please consult for the details my article published in Rodo-Soken News, No. 133. Here are basic ideas:
1) The most urgent task to achieve now is to find a way out of the prolonged recession, and for this, it is of absolute need to increase people's purchasing power;
2) Banks' function as money-lending agent should be restored immediately. Prerequisite for this is a full-scale information disclosure by banks, and transparency of banks' management is essential as well;
3) The disposal of banks' non-performing loans should be carried out based on a full-scale disclosure of information and accountability of the bank, with due consideration is given to positions of all the parties concerned. Monitoring by people and above all, the establishment of a democratic government that has people's trust are all the more important.
The writer is Honorany Professor, Chuo-Univesty