After days of wrangling, the government and the ruling coalition finally agreed on a comprehensive economic package Wednesday evening that calls for stricter assessments of banks’ assets sometime in the future and the creation of a new body to aid struggling firms.
The package was hammered out as a compromise between reform-minded Financial Services Minister Heizo Takenaka, who wants to take strict and decisive measures to fix the economy, and bankers and politicians in the ruling coalition who want to cushion the blow.
It calls for the government to set up a headquarters led by Prime Minister Junichiro Koizumi to rehabilitate the country’s troubled financial and industrial sectors.
The government will also set up a special organization to buy debts of struggling companies from banks and possibly extend further financial assistance to the debtors.
Takenaka, a former economics professor, was forced to compromise on the timing on when banks’ assets will be more strictly assessed and how much stricter the assessments will be.
In the face of strong opposition from bankers and the ruling coalition, led by the Liberal Democratic Party, the specific timing was dropped from the package.
As banks accelerate disposal of bad loans, they are expected to become more reluctant to extend fresh loans to problematic borrowers, which will likely force many of them to go under.
Although the state-run Resolution and Collection Corp. was established to help struggling firms, the government intends to bolster the RCC’s debt-collecting efforts with the new body, which is likely to be independent from the RCC.
Meanwhile, the government appears to be leaning toward compiling a supplementary budget for fiscal 2002 to help finance the package.
Earlier in the day, Finance Minister Masajuro Shiokawa expressed a willingness to compile an extra budget on condition that funds already appropriated for the initial budget are spent first.
“I am aware that the money (in the current budget) will not be enough. If money is needed, it is government’s responsibility to have money ready at any time,” Shiokawa told a Diet committee session.
The most controversial issue in compiling the package was whether to use stricter accounting rules to assess banks’ assets.
Banks are allowed to count deferred tax assets, or future tax refunds, as part of their core capital. The deferred assets constitute around 40 percent of their core capital and have the effect of inflating their capital-to-asset ratios.
If stricter rules for calculating capital are applied, those tax assets would shrink and deflate the capital-to-asset ratios of major banks, which must maintain a level of at least 8 percent to operate internationally.
To avoid that, the weaker banks will have to reinforce their capital bases, which would likely be carried out through government injections of taxpayer money.
The comprehensive economic package also features measures to alleviate the pain expected from accelerating bad-loan disposal. The features range from tax reform to beefing up a safety net for the unemployed.
As a way to strengthen asset markets that have been undermined by deflation, the government plans to lighten tax burdens related to stock and land transactions.
Also, the government plans to order tax cuts of more than 1 trillion yen for companies to stimulate research and investment in plants and equipment.
The package includes measures to assist startups and to promote regulatory reform that will stir up consumer demand.
The government also plans to revise the Law on Special Measures for Industrial Revitalization to promote industrial restructuring.
Although Takenaka planned to release an outline of steps to stabilize the financial system last week, the release was delayed due to opposition from the banking sector and the ruling coalition.