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An economic package Japan adopted last week to speed up the disposal of bad bank loans and fight deflation was disappointing and a step back from original reform proposals, a U.S. economist said.

“The package makes me very sad because it does even less than I had hoped,” Adam Posen, a senior fellow at the Institute for International Economics, a Washington-based think tank, said in a recent interview with Kyodo News. “I don’t think that anybody in the United States government honestly believes that things are going to get better as a result of this.”

Before Japan adopted the package on Oct. 30, the U.S. government — as well as private economists and analysts inside and outside of Japan — threw strong support behind the original reform measures proposed by Financial Services Minister Heizo Takenaka, the package’s main architect.

“I was hoping Prime Minister (Junichiro) Koizumi would give him more support and (that) they would force the issue a little further than they did,” Posen said. “They didn’t.”

Posen was pessimistic on the future of the Japanese economy.

“The choice now is Japan will either continue to stagnate with deflation and increase in bad loans the way it was the last few years. That’s the best,” Posen said.

“At worst, I worry there is a real risk of a financial problem like in 1998, but bigger,” he said, referring to a series of collapses of big Japanese financial institutions that year.

Posen said there is a lot of bad news about the package.

“There is too much emphasis in the package on saving (delinquent) borrowers and too little on closing banks,” he said.

Posen said there is nothing in the package to force ailing banks to take public funds and change management, and that no starting date was set for plans to limit deferred tax assets a bank can count as core capital.

Under the package, a new body will be created to extend loans and help struggling companies, especially smaller businesses, which could see their financing cut off in the process of the banking-sector cleanup.

“If people really use that to close some zombie companies, that could be very good news,” Posen said. “But it could also be bad news because it could mean that they just keep giving money to the borrowers anyway.”

Posen downplayed speculation that the U.S. is supporting Takenaka’s hard-landing approach in order to have U.S. investors buy Japanese companies and banks at cheap prices.

“I know some politicians tried to say that this was the U.S. trying to look out after itself, but this is what we call win-win. It would have been good for Japan and the U.S.,” he said.

Posen said that sometime last summer, the administration of President George W. Bush changed its policy of not putting “gaiatsu,” or outside pressure, on Japan.

“When Glenn Hubbard took over being in charge of the economic policy toward Japan, he quite reasonably realized that a little gaiatsu is OK,” Posen said. “Particularly in a situation where it looked like there was potential for some real instability in Japan, the risks of doing nothing went up.”

Hubbard, chairman of the White House’s Council of Economic Advisers, visited Japan in early September and called for bank reform and further monetary easing. In October, he voiced full support for Takenaka’s reform plans.

Posen said the Bush administration was quiet in its first 18 months because the U.S. economy was strong enough to survive a weak Japanese economy.

But with the U.S. stock market decline over the summer, the Bush administration judged the U.S. economy not as strong as it was and thought the Japanese economy looked even weaker, Posen said. As a result, the U.S. reassessed its economic policy toward Japan and concluded it would be more effective to increase pressure, he said.

But Posen said the U.S. government will be much less vocal on economic issues with Japan over the next few months as it wants to maintain good terms with Japan due to issues related to Iraq and North Korea.

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