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BOJ Gov. Masaru Hayami on Monday again called on banks to avail themselves of the government’s newly legislated recapitalization scheme.Speaking at the Bank of Japan’s quarterly meeting of branch managers at BOJ headquarters in Tokyo, Hayami urged financial institutions to accelerate the cleanup of their problem loans and revitalize the nation’s weak financial system.”At the moment, it is an urgent task for the nation’s financial institutions to overcome their bad-loan problems and restore their confidence,” he said. “I strongly expect all banks to take measures to strengthen their capital base and management by utilizing a new legal framework properly in light of their position.”Strengthening the banking system will contribute to economic recovery, he stressed. The banks should decide “at an early date” to apply for public money to bolster their capital bases under the new scheme, which allocates 25 trillion yen for recapitalization efforts, he said.The central bank chief also voiced concern over the bleak chances of an early economic recovery despite the bank’s further easing of its monetary policy. On Sept. 9, the central bank decided to guide the unsecured overnight call rate, the key short-term interest rate, down to around 0.25 percent on average. “Although the interest rate has decreased since the credit-easing, stock prices are still floundering,” Hayami said. “Companies’ investment in equipment continues to shrink due to severe corporate finance conditions resulting from the financial institutions’ credit crunch.”Affected by such poor demand in the private sector, production has dropped sharply and employment and income conditions have become even more severe, he said. “Further deterioration of the economy is expected to slow down as the government’s stimulus package and the BOJ’s credit-easing take effect,” he said. “However, a fast economic recovery is unlikely, considering the pressure of this negative cycle (linking production, income and expenditure) on business and the unclear prospects of overseas economies.” Hayami also said that the BOJ is determined to make every effort to help stabilize the nation’s financial system by utilizing its ample reserves under its current easy monetary policy.Managers from the central bank’s 33 branch offices and its representative offices in London, New York and Hong Kong attended the meeting; most reported that business conditions in their regions remain dismal.Many pointed to further slides in private consumption and housing investments. The only bright spot in their reports appeared to be the growth of public works spending, thanks to pump-priming packages. Some noted that a rise in bankruptcies, especially among construction firms and small businesses, has led to increased unemployment and reduced consumer spending.Osaka branch manager Minoru Masubuchi said corporate income and equipment investments have deteriorated in the Osaka, Nara and Wakayama areas, worsening the employment situation. “I believe the credit crunch at financial institutions is behind this,” he said. “Many companies in those areas have urged authorities to revive the ailing financial system.”Masubuchi also pointed out that the effect of government stimulus measures is becoming visible in these areas, noting that orders for public works projects are increasing. “I expect that the effect of such increases in orders will reach businesses at the end as soon as possible,” he said.

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