BOJ Gov. Masaru Hayami said Thursday that Japan should not relax its efforts to promote structural reforms and dispose of banks’ nonperforming loans despite the recent economic uptick.

Hayami also said in a speech at a Tokyo hotel that Japanese banks may have to seek further industry realignment as bad loans are likely to continue mounting.

“Japan should not feel at ease about the recent cyclical economic improvement and needs to firmly promote both the disposal of nonperforming loans and economic and industrial reforms, in order to achieve autonomous and sustainable economic growth,” Hayami told a forum affiliated with Kyodo News.

It is the third time since the burst of the bubble economy that Japan has seen a recovery pattern, he noted.

Hayami indicated a sustainable economic recovery will not begin immediately, partly because of weak private demand.

“The pace of economic deterioration has moderated as exports increase and production starts to pick up following progress in inventory adjustment,” Hayami said. “However, there is no clear sign that a recovery in private demand, which is key to achieving a sustainable recovery, is happening.”

He added that corporate capital investment has been decreasing and personal consumption remains weak because of severe employment and income environments.

He also said it is likely to take “considerable time” for a recovery in exports and production among manufacturers to spread to nonmanufacturers, small to midsize firms and households.

Meanwhile, Hayami said he does not think the disposal of nonperforming loans has peaked despite banks’ efforts to accelerate writeoffs.

“There is concern that banks’ loans will further deteriorate for a short period of time as economic structural reforms are implemented,” Hayami said.

Japan’s major banks, which released their financial results last week, booked a combined 7.72 trillion yen in loan-loss charges in the 2001 business year, up from about 4.3 trillion yen the previous year.

They accelerated their disposal of nonperforming loans following special bank audits by the Financial Services Agency, conducted in the latter half of the business year.

However, their combined outstanding balance of nonperforming loans, as of the March 31 end of fiscal 2001, ballooned to a record 26.78 trillion yen, up about 30 percent from 20.69 trillion yen six months earlier.

Hayami said banks may have to seek mergers to help them solve the nonperforming-loan problem and improve profitability.

He reiterated that the government would have to inject public money into banks if concerns over the stability of the nation’s financial system arise following further disposal of bad loans.

Hayami also said he will closely monitor foreign exchange moves.

The yen has recently appreciated against the dollar, making exporters’ products more expensive abroad and decreasing their yen earnings.

With interest rates already at zero and the government’s massive debt load making further spending packages difficult, authorities increasingly see the foreign exchange market as a tool to relieve the economy’s deflationary pressure. They have been actively talking down the yen and intervening to weaken the currency.

But the yen’s current relative strength, Hayami said, “appears to reflect a modification of the bullish view of the U.S. economy’s prospects and emerging expectations for a recovery in Japan.”

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