Richard Koo appears to be one of the small group of dissenters vocally critical of the economic and fiscal policies of Prime Minister Junichiro Koizumi and his Cabinet.

Koo, chief economist at Nomura Research Institute Ltd., believes that fiscal stimulus steps are necessary for Japan to achieve sustainable economic growth and that the government shouldn't be hasty disposing of banks' nonperforming loans.

Now his prescriptions for the Japanese economy are being shared more by Japanese business and political circles and also, it seems, by some in the United States.

Koo's proposals conflict with the policies of Koizumi, who has pressing for fiscal restraint and quick resolution of the banking system's nonperforming loan problem.

Koizumi believes a full-fledged economic recovery will not be achieved unless fiscal health is restored and corporate activities are reinvigorated via bad-loan disposal.

Koo, on the other hand, said in a speech earlier this month that Koizumi needs to expand fiscal spending to stimulate the economy because the private sector is not creating demand that can increase economic growth under a "balance sheet recession," a view he has consistently advocated since Koizumi took office.

He said that he is not alone in calling for an expansionary fiscal policy, noting that the International Monetary Fund has finally taken the unusual step of suggesting Japan compile an extra budget.

A balance sheet recession is a rare type of slump in which the corporate sector pays off debt and refrains from borrowing to invest -- even at times when interest rates are extremely low -- so it can concentrate on cleaning up their accounts, Koo said.

Koo said that cleaning up the balance sheets is the right approach, although it means corporations are placing less priority on optimizing profits.

Japanese companies used to tap the high volume of household savings funneled in through the banking sector to invest in assets and new product development, Koo said.

About 10 years ago, companies were estimated to be borrowing 50 trillion yen per year, which equates to 10 percent of the nation's gross domestic product, Koo said.

But corporations today are not borrowing that much money, which is resulting in sluggish GDP data, and have even become net suppliers of funds to the banking system. Companies are repaying debt to the tune of 20 trillion yen a year as they restructure their balance sheets, Koo said.

He said the government needs to expand fiscal spending to support the economy until the corporate sector completes its cleanup.

At a meeting of a panel on infrastructure development at the Ministry of Land, Infrastructure and Transport on July 2, Koo reportedly urged the active promotion of road construction projects to stimulate the economy.

His opinion was again the minority one on the panel, which issued an interim report two weeks ago calling for curbing the construction of toll roads under a new five-year road construction plan that starts in fiscal 2003.

Koo urged Koizumi in his speech to abandon his 30 trillion yen limit on new government bond issuance to take a more realistic approach to supporting the economy.

Koizumi has pledged to cap fresh government bond issues at 30 trillion yen a year in fiscal 2001 and the current fiscal year in the name of fiscal discipline, and has also rejected mounting calls for compiling a supplementary budget. But he has also said that the government will not necessarily enforce the bond cap in fiscal 2003, which is simply because new bonds are expected to be needed in amounts far beyond the 30 trillion yen limit. For next year, Koizumi plans to compile an austere budget by limiting policy-related spending.

Koo said he is not saying that fiscal reform is unnecessary, but that efforts to restore fiscal health should be promoted after balance sheet adjustments are completed.

Koo said the balance sheet problem has been damaging the economy more seriously than nonperforming loans, and advised the government not to rush to get rid of them all.

His view contrasts sharply with that of the government and several foreign economists, which see nonperforming loans as the primary cause of Japan's economic woes and believe rehabilitation will not occur without urgently addressing it.

Koo said economic activity has been dull not because financial institutions cannot extend loans, but because companies are unwilling to borrow in light of their disturbing balance sheets.

If the problem was simply the banking sector, it would lead to sharp rises in interest rates because firms willing to borrow money would be competing for a limited amount of financial resources, Koo said.

But that is not what is happening, he said.

The Bank of Japan's monetary policy will not have a significant impact on boosting capital demand in Japan's current situation as firms have put priority on repaying debt.