When Prime Minister Junichiro Koizumi took office in April 2001, he told the public that pain was a necessary evil in the process of rehabilitating the corporate sector and achieving financial stability.
But the figures tell a different story.
Nearly 2 trillion yen was plowed into Resona Holdings Inc., a banking group reporting a capital shortfall of just over 60 billion yen; 10 trillion yen has been put at the disposal of the Industrial Revitalization Corp. of Japan, a public entity tasked with bailing out distressed firms; and a government-affiliated bank extended 10 billion yen in credit to Daiei Inc., a struggling retailer ignominiously labeled a “zombie” firm.
These measures constitute just the tip of the iceberg in terms of the public funds Koizumi has put on the line to minimize pain while simultaneously winning market backing for his reforms.
“Pay attention to what Koizumi has done, not what he says,” said Takehiro Sato, an economist at Morgan Stanley. “The fact is that to ward off potential crisis, the public sector is taking over large chunks of finance.”
Indeed, Koizumi’s decisions thus far present a confusing trail of contradictions and half-baked policy steps. Sympathizers say he can’t help it — each of his bold objectives is compromised before he can win the approval of the Liberal Democratic Party, and sweeping statements are hedged as the prime minister fights to stay in power.
Koizumi’s battle strategy for the LDP presidential election later this month will be just as important as whether or not he succeeds, according to Satoshi Matsubara, an economics professor at Toyo University.
“If Koizumi succeeds in winning on a platform the LDP absolutely hates, then he will be free to act as he wishes in the key months ahead,” Matsubara said. “This would be a huge step in freeing what was stagnant in the economy.”
Despite his strong chances for re-election, however, Koizumi’s recent statements indicate a growing reluctance to defy dissenters within the LDP.
Following a visit Friday from LDP policy affairs chief Taro Aso, during which Aso essentially demanded the removal of Financial Services Minister Heizo Takenaka in the next Cabinet reshuffle, Koizumi merely said, “I will decide on whom to appoint upon looking at the situation after the election.”
It was a far cry from his assertion a few weeks ago that, “Mr. Takenaka is doing a good job; I have no intention of removing him.”
Aso’s action signifies resentment within the party toward Takenaka’s tough stance on banking issues.
In September 2002, Takenaka, then exclusively serving as minister for economic and fiscal policy, took over the financial services portfolio from Hakuo Yanagisawa, who was sacked by Koizumi for his reluctance to use public funds to nationalize banks.
But the following month, the prime minister refused to explicitly back Takenaka’s proposal to toughen accounting standards for banks, leaving the minister open to attack from LDP heavyweights.
The result has been a watered down effort to clarify the true strength of banks and their borrowers.
Indeed, Koizumi’s tenure has been pockmarked by a trail of compromise with LDP dissenters.
In seeking to defuse anxiety over the strength of the banking sector, the prime minister has moved away from a “hard landing” scenario, in which banks would be allowed to fail without a safety net for depositors or borrowers.
Koizumi’s decision in October to extend the full state guarantee on current deposits from April 2003 until April 2005 was a defining moment in this respect.
Another was his approval of a decision by the Development Bank of Japan to provide Daiei with 10 billion yen, essentially implementing a state guarantee that the leading employer would not fail.
The government has also set up the IRCJ to assist troubled firms, put the brakes on rising unemployment and ease jitters over possible corporate failures.
“Say you let all (deeply indebted) companies fail. What can be born from that?” queried IRCJ President Atsushi Saito.
Saito, a former vice president of Nomura Securities Co., advocates a “Japanese-style turnaround,” which is supposedly kinder toward employees and business partners than foreign buyout funds driven to earn profits for investors.
There’s little wonder that Koizumi is now seeking to avoid pain.
His first year in office saw the collapse of debt-ridden retailer Mycal Corp., as well as a flurry of general contractors, driving the number of bankruptcies in fiscal 2001 to the second-highest figure in the postwar era.
Share prices on the Tokyo Stock Exchange subsequently tumbled from one postwar low to another as market players sought to identify the next failure.
“People say, ‘Who but Koizumi?’ I say, ‘Anybody but Koizumi,” grumbled one life insurance firm executive in the spring, vexed by exploding unrealized portfolio losses.
Since then, however, maneuvers such as the Daiei lifeline and emergency public funds extended to small and midsize firms have helped the number of bankruptcies fall on a year-on-year basis for seven consecutive months.
Perhaps the icing on the cake was the 1.96 trillion yen bailout of Resona.
This apparently calmed market anxiety as it was viewed as evidence that Koizumi and Takenaka would not pursue reforms at the expense of the entire financial system, Toyo University’s Matsubara said.
The scholar added that with markets now stabilized, Koizumi should go on the offensive and run for re-election on his original platform of reforms.
Some experts say the economy can’t afford much more dithering.
An army of companies is just waiting to go over the brink, according to Takakazu Nakamori of credit research firm Teikoku Databank.
“Fewer bankruptcies just represents how many companies are living hand to mouth, feeding off emergency loans and other support from public entities,” he said. “So long as the government postpones pain, the more unclear the economy’s future will be.”
If he succeeds in winning re-election, Koizumi will face some tough political decisions when that dam bursts.
Little support can be expected from the nation’s banks any time soon. Their capital deteriorated in fiscal 2002, as they made some headway in writing off their problem loans.
The amount of outstanding bad loans reported to the FSA fell to 35.3 trillion yen in fiscal 2002, a year-on-year drop of 18.3 percent. The trade-off comes in banks’ declining ability to unearth new businesses to finance.
Sato of Morgan Stanley fears that any more muddling will encourage further public involvement aimed at cushioning the pain of large corporate failures.
If this continues, he said, the ultimate cost will be a loss of incentive for innovative companies as deadbeats are preserved.
One thing is certain — all the while, the value of businesses and their assets are eroding through deflation and dwindling demand.
With Japan’s debt now standing at 140 percent of its gross domestic product, “it’s a race between reforms that will help the economy grow over the long-term and the government’s capacity to absorb pain,” Sato said.