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The emergency economic measures unveiled Friday, which focus on reducing banks’ sour loans, leave unanswered the key questions that will determine their success.

The plan calls on Japan’s 15 major banks to complete the disposal of existing problem loans — which the Financial Services Agency estimates at 12.7 trillion yen — within two years. Disposal of newly arising nonperforming loans is to be completed within three years.

The following are the major points of the emergency economic package:

Reconstruction of the financial system and industrial revitalization:

* Major Japanese banks will within two years remove from their balance sheets outstanding loans to borrowers that are bankrupt or considered likely to collapse, while loans that subsequently turn bad will be disposed of within three years.

* A limit will be imposed on the value of banks’ stockholdings, to ensure they remain within their risk management capacity.

* Bank Equity Purchasing Corp. will be set up with contributions from banks and other entities to absorb selling by banks of their excess stockholdings. Details of the body, including necessary legal revisions, will be decided as soon as possible.

Stock market reform:

* Exchange-traded funds linked to stock indexes will be introduced as a tool to sell to investors a package of stocks unloaded by banks to unwind their cross-shareholdings.

Urban redevelopment:

* The Urban Development Center will be established within the government to promote urban development projects.

Job creation and safety net:

* Deregulation and reform will be brought forward in the areas of information technology, recycling, the medical system, child-rearing and care for the elderly.

* Involuntary retirees will be allowed to receive better jobless allowances than other unemployed people.

Tax reform:

* Tax reforms will be considered as early as possible to help attract individual investors to financial markets and to liquidate real estate.

Banks will be called on to accomplish the “final disposal” of bad loans through debt forgiveness, securitization or calling in loans from troubled borrowers.

The final option would force corporations into bankruptcy.

Analysts say an inherent problem is that banks are likely to opt for partial debt forgiveness, even to borrowers whose earnings are unlikely to improve, which means banks’ balance sheets would continue to suffer.

Roughly half of outstanding problem loans are with general contractors, major real estate developers, wholesalers and retailers, according to the FSA.

Koya Hasegawa, an analyst for UBS Warburg Securities, said a reason banks are likely to take writeoff route is that they fear the huge social cost of allowing these firms to fail.

Yet these are precisely the industries whose business performance is unlikely to recover while the value of assets continues to fall and consumer demand remains sluggish.

“Since the new year, the financial situation of borrowers, especially among the three industries (construction, real estate and distribution) worsened at a surprising speed,” said Hiroya Nobuhara, vice president of Sanwa Bank.

He was speaking at a recent news conference announcing that the three UFJ group banks — Sanwa, Tokai Bank and Toyo Trust Bank — will writeoff 1.13 trillion yen in nonperforming loans for fiscal 2000.

The decision to waive debts is made between banks and their clients along FSA guidelines. The company is required to submit a plan detailing its projected earnings and restructuring efforts.

Friday’s plan calls for new guidelines and the creation of a government body to supervise debt waivers.

“Calling for government participation is fine,” said Hasegawa of UBS, “but I am going to wait to see how the scheme works, and whether viable restructuring and consolidation really takes place in these industries.”

If borrowers’ profits continue to flounder despite restructuring commitments, banks may find themselves further committed to problem firms requiring future bailouts, he said.

Furthermore, although the FSA says it will monitor the progress of loan disposals on a daily basis, analysts question whether banks can handle the pace of newly arising bad loans.

“The deteriorating economic situation and the enforcement of stricter risk assessment will result in increasing volume of loans categorized as nonperforming,” said Yasunari Ueno, chief market economist at Mizuho Securities Co. “The question is whether banks can dispose of bad loans faster than new ones arise.”

FSA officials suggest that banks create special teams to counsel companies in danger of defaulting on their repayments.

But Ueno is skeptical: “Given banks’ resources and expertise now, there is a limit to how many companies a given bank can guide back to profitability.”

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