Prime Minister Junichiro Koizumi’s “No Pain, No Gain” approach to mending the economy will accomplish little more than a surge in bankruptcies and unemployment, Teikoku Databank warned in a report released Wednesday.

“The pledge to go through with final disposal of banks’ bad loans (within two to three years) has the very worst timing . . . when the economy is headed for a downturn and at the same time that financial and fiscal policies can do little to help recovery,” said Katsuyuki Kumagai, general manager of the private research institute’s information department.

The estimated 12.7 trillion yen worth of nonperforming loans held by the nation’s 16 major banks can be divided into two groups: those made to large firms during the asset-inflated bubble economy of the 1980s, and more recent loans to small and medium-size firms, the report said.

The large loans — the ones banks have wanted to resolve for the last decade — cannot be sold, at least without enormous losses, the research agency said. “Banks have done their best by setting aside loan-loss reserves and will not be able to do more just because the government says they should,” the report said.

The small to medium-size companies, the so-called victims of deflation, are the ones likely to suffer, Teikoku said.

Forcing problem borrowers in this category into bankruptcy will result in deflationary pressure that will further drive small companies to become delinquent on their loans, the report said.

“Acute conflict of interest between banks and their borrowers will interrupt efforts to put weak firms back on their feet and increase the possibility of large-scale bankruptcies,” as in the case of department store chain Sogo Co. and some large insurance companies, the report said.

Problem loans and loans to borrowers requiring attention by all of the nation’s banks are estimated to be worth as much as 150.9 trillion yen, and experts warn that a major portion of those loans could easily go sour, depending on the conditions.

Teikoku Databank has tallied corporate bankruptcies and their causes since 1900.

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