Prime Minister Junichiro Koizumi said Thursday the government will take every possible measure in cooperation with the Bank of Japan to accelerate the disposal of nonperforming loans and prevent a financial crisis.

However, he said there is no silver bullet to end deflation.

“The disposal of nonperforming loans is a key pillar to overcoming deflation,” Koizumi said in a speech at a Tokyo hotel. “And I will accelerate the disposal to normalize the situation in fiscal 2005 as planned.”

The BOJ said Wednesday it will consider directly purchasing shares held by more than a dozen Japanese banks to protect them from fluctuations in share prices.

The surprise BOJ move — unprecedented and abnormal for a central bank of any major industrialized economy — has been greeted with mixed reactions even within Koizumi’s government and the ruling coalition.

Despite being welcomed by Financial Services Minister Hakuo Yanagisawa and Finance Minister Masajuro Shiokawa, Heizo Takenaka — the economic and fiscal policy minister — said the BOJ should have explored conventional policy tools to boost the money supply.

Which is unusual, considering that both he and Shiokawa had just weeks ago urged the BOJ to take the unorthodox step of using public pension and postal savings money to invest in exchange-traded funds (ETFs) — an illegal transaction for the central bank.

Taro Aso, chairman of the Policy Research Council of the Liberal Democratic Party, also blasted the BOJ’s move.

“It will cause many problems,” he told reporters. “The BOJ should take responsibility for when it acts independently from the government.”

Basic problems remain

WASHINGTON (Kyodo) The proposed purchase of stocks from commercial banks by the Bank of Japan will probably not resolve Japan’s basic economic problems, a former U.S. Treasury assistant secretary said Wednesday.

“I think one has to view this as a sign of how serious the problems are in Japan,” Charles Dallara, managing director of the Institute of International Finance, said at a news conference. “But this does not to me sound like . . . a fundamental solution.”

Asked for his opinion on the BOJ plan, Dallara said Japan needs to instead accelerate the disposal of bad loans by banks and deregulate to get out of the doldrums.

“In my view, the answer lies more in the direction of aggressive resolution of problems which linger over the financial sector, more in the direction of further liberalization,” he said.

FT slams BOJ plan

LONDON (Kyodo) The Bank of Japan’s plan to buy shares held by banks lacks policy coherency and does not provide a fundamental solution for bolstering the banking system, the Financial Times said Thursday.

“The BOJ’s latest measures smack more of desperate expediency than joined-up policymaking — and for that very reason may well have the opposite effect to the one intended,” the British economic daily said in its editorial. “Longer term, outside investors are likely to be alarmed, rather than comforted, by the bank’s move.”

The paper conceded that the central bank, having exhausted all orthodox policy measures to fight deflation, needs to resort to unorthodox measures.

But it added, “Unfortunately, this does not seem to be the case — at least judging by the bank’s stated intentions and the reaction of other Japanese policymakers.” The BOJ’s measures are designed to be “a tactical fix to bolster the banks’ balance sheets, rather than representing any strategic change of policy,” the newspaper said.

“Even from a pragmatic viewpoint, though, the BOJ’s plan lacks coherence, amounting to little more than a covert form of off-balance-sheet subsidy,” it also said. “Who is to decide which shares to buy and when to sell? This is to be a murky process, fraught with risks of manipulation.”

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