WASHINGTON – The United States, in a rare move, expressed its full support Friday for a plan to eradicate bad loans at Japanese banks proposed by Heizo Takenaka, Japan’s new financial services minister.
“We all continue to believe that he is an excellent reformer, somebody who is not only a very talented economist but somebody with a very strong commitment to the agenda that Prime Minister (Junichiro) Koizumi set out,” Glenn Hubbard, chairman of the White House’s Council of Economic Advisers, said in an interview with Japanese news organizations.
Hubbard pinned strong hopes on a new package of economic measures, based on Takenaka’s proposals, that is being considered by the Japanese government to accelerate the disposal of bad loans and revitalize Japan’s economy.
At a regular State Department press briefing, meanwhile, spokesman Richard Boucher also expressed support for Takenaka’s banking reform initiative.
“We welcome the indications and commitment that are being shown by Prime Minister Koizumi and Minister Takenaka to dispose of nonperforming loans and to address these important issues,” Boucher said at the press briefing.
It is rare for the spokesman to make comments on Japan’s economic reforms without first being asked about the matter by reporters.
Takenaka assumed the post of financial services minister in last month’s Cabinet reshuffle, while retaining his position as minister in charge of economic and fiscal policy.
He has pledged to drastically dispose of bad loans by even letting major banks and companies fail if they are no longer viable.
His hardline approach, however, has triggered a sharp fall in the Tokyo stock market, in anticipation of a steep rise in bankruptcies.
Takenaka, a former university professor, lacks political support and is facing resistance from the old guard in the ruling Liberal Democratic Party, who favor a more moderate approach.
The Japanese government plans to announce the outline of a new economic package as early as this week. The U.S. has long wanted Japan to revitalize its economy by fixing the bad-loan problem. It seems to be giving Takenaka a helping hand with the praise, apparently in a bid to prevent Japan from backpedaling on economic reform.
In Friday’s interview, Hubbard said it is necessary to inject public funds to strengthen banks’ capital bases and accelerate their bad-loan disposal. He said the use of public funds, however, should be limited to viable banks.
“It wouldn’t make much sense to take taxpayers’ money and prop up failed institutions and make no changes — that can’t be in taxpayers’ interests,” he said.
Hubbard called on the Bank of Japan to offer a “more expansionary monetary policy” to end deflation and help support the government’s economic reforms.
“I think that the Bank of Japan can play a very constructive role, indeed must,” he said. “It is very hard for Japan to right itself and have a meaningful recovery until the deflationary pressures are stopped.”
Hubbard called for tax cuts as part of the planned economic package.
He also emphasized the need for the Japanese government to create a “more vigorous safety net to catch workers who may be in transition from one job to another” and devise measures to encourage “new, entrepreneurial sectors in the economy.”
Hubbard said the compilation of a traditional supplementary budget centering on public works projects will not be helpful for the economy.
Hubbard acknowledged the feeling in Japan that rapid banking and corporate restructuring is painful, but he said that once the government puts a new set of specific policies in place, stock prices will eventually rise again.