• Kyodo

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The International Monetary Fund urged Japan on Saturday to promote banking and corporate restructuring “vigorously” and to clean up bad loans in its banking sector.

“In Japan, banking and corporate restructuring should be vigorously pursued, in particular addressing the issue of nonperforming loans,” the IMF’s International Monetary and Financial Committee said in a communique issued after a one-day meeting.

The IMFC, which guides IMF policy, consists of finance ministers and central bank governors from the United States, Japan and 22 other IMF member countries.

Japanese banks hold trillions of yen in nonperforming loans. This makes many banks reluctant to provide new loans, particularly to young companies. Some economists see the problem as a root cause for the decade of economic sluggishness in Japan.

The IMF policy panel also pressed Japan to step up monetary policy to combat deflationary pressure. “In Japan, monetary easing should end deflation,” according to the communique.

Bank of Japan Gov. Masaru Hayami vowed in a speech at the meeting to make “bold” efforts to break the deflation cycle, which has dragged down the Japanese economy over the past three years.

“Although the Bank of Japan has been providing ample liquidity, deflation still continues. The BOJ, together with the government, intends to make further bold efforts to cut off deflation,” he said.

Hayami said the BOJ’s recently unveiled plan to buy from troubled banks the stocks held by those banks will contribute to the stability of the financial system.

The controversial stock-buying plan, announced last week, is intended to protect banks from the sagging stock market, which has caused massive latent losses in banks’ stock assets.

Echoing the outlook from a statement issued Friday after a meeting of top Group of Seven financial officials, the IMFC said, “The global economic recovery is proceeding, although at a slower pace than expected earlier this year.”

The IMF meeting took place amid concerns about the pace and durability of the global economic recovery. Sharp falls in stock prices, financial crises in Latin America and fears of a possible U.S. military attack on Iraq are causes for concern.

“We meet here in Washington at a testing time for the world economy,” British Chancellor of the Exchequer Gordon Brown, chairing the IMFC meeting, told a news conference after the session.

“There was strong agreement, indeed broad agreement on the need for vigilance, and that we should stand ready to act if risks exist.”

At the IMFC meeting, U.S. Treasury Secretary Paul O’Neill urged Japan and Europe to boost domestic demand so they can serve as engines for global economic growth.

“It is critical to the health of the world economy that all industrial nations implement the sound macroeconomic policies and structural reforms necessary to sustain robust demand and create multiple engines of global growth,” O’Neill said in a speech.

The IMF panel welcomed U.S. efforts to strengthen corporate governance following a series of corporate accounting scandals and called on Europe for further reforms in labor and product markets.

The communique also touched on the importance of stability in oil markets “at prices reasonable for consumers and producers.”

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