WASHINGTON – Japan still faces the possibility of financial crises despite the recent rebound in stock prices, and it needs to promote the disposal of bad loans, former chief White House economist Glenn Hubbard said Tuesday.
“I don’t think that Resona is the last Japanese bank to be in trouble,” Hubbard, former chairman of the White House Council of Economic Advisers, said in an interview.
At the end of June, the government injected 1.96 trillion yen in public funds into Resona Bank, the core unit of Resona Holdings Inc., to replenish its depleted capital base.
Resona Bank was forced to seek the government bailout because its capital adequacy ratio had plunged due to the sharp fall in stock prices earlier this year, the disposal of bad loans and stricter capital calculation standards.
“I think that there are still problems in the banking sector and the insurance sector that will take some time to work out,” Hubbard said.
“The issue is to get those institutions healthier by taking the bad loans and getting them recycled back into the private sector,” he said.
Hubbard, currently a professor at Columbia University in New York, warned against optimism about an early recovery in the Japanese economy despite the recent rally in stocks.
“The near-term prospects still don’t look that good to me,” Hubbard said. “It is very hard for me to see over the next year or so much of a recovery at all.”
Hubbard, who resigned as CEA chairman at the end of February, also said Japan needs to further ease its monetary policy to put an early end to deflation.
While stressing exchange rates should be set by market forces, Hubbard said a weak yen against the dollar that would result from Japan’s easier monetary policy would be acceptable in the currency market.
“I think that the best economic policy for Japan would involve a more expansionary monetary policy, which might indeed weaken the yen, but that would be a consequence of that policy,” Hubbard said.
Japanese authorities stepped into the foreign-exchange market a number of times in the April-June quarter to stem the yen’s rapid rise against the dollar.
Japan is worried that a stronger yen would weaken the international competitiveness of Japanese exports, currently the only bright sector in the economy.
Tokyo is putting priority on rebuilding its strained national finances, but Hubbard said Japan also needs to stimulate its economy from the fiscal side for the time being.
“In the short term, there is still room for fiscal policy to grow,” he said.
In terms of fiscal policy measures Japan should take, Hubbard recommended tax reductions that would contribute to a recovery in stock and land markets.