The announcement that the governor of the Bank of Japan was considering the purchase of company shares held by Japanese banks at market prices has done nothing to reassure opinion in Britain about the state of the Japanese economy. The general view remains, to quote the Financial Times, “that price deflation is public enemy No. 1 for the Japanese economy,” but no one seems to think that the BOJ’s declaration, unprecedented for any central bank, provides the answer to Japan’s problems.
The skeptics think that this is basically a ploy to stop the stock market falling and help Japan’s commercial banks to demonstrate that they have adequate capital to tide them over the half-year financial period ending Sept. 30, when they must book latent losses from falling stock prices; in other words, that it is simply a stopgap measure. But the pessimists suggest that this is more than just a ploy. They say that it shows that the Japanese banking crisis, which has been apparent for years, is even more serious than observers had thought, and that without such drastic steps to prop up banking assets Japan’s financial markets and financial system are in real danger of collapsing, thus suggesting that these are panic measures.
We must all hope that the pessimists are wrong and that effective measures can overcome Japan’s banking crisis. The FSA have admitted that Japanese banks have nonperforming loans “worth” 43,000 billion yen. Most economists think that the “value” of nonperforming loans is at least double this amount and that as price deflation continues the amount is increasing all the time.
There are real risks and moral hazards involved in the BOJ’s decision to buy shares from the banks. Presumably, the banks will try to use the opportunity to dispose of their least attractive shareholdings, leaving the BOJ the owner of some of Japan’s poorest performing companies. The BOJ is not qualified to exercise effectively the rights that, as substantial shareholders, it is likely to acquire to intervene in the management of the companies whose shares it buys. It may have to let some companies fail or prop them up by further loans. If the bear market continues it will have to book losses on the BOJ’s balance sheet. At some stage in the future the BOJ will have to find ways of disposing of its ill-judged share purchases. Unless there is then a real bull market, share prices will be further depressed by such sales. the BOJ may well have compromised its hard-won independence.
Observers have surmised that the BOJ only took this decision in response to pressure from the Japanese government, and demanded and obtained in return that the government take other effective measures to deal with the banking crisis. But early comments from Japanese government sources do not confirm this surmise. Heizo Takenaka, economics and fiscal policy minister, reportedly expressed puzzlement and asked why the BOJ adopted a measure such as this. A safer approach for the BOJ to help combat deflation might well have been to step up purchases of Japanese government bonds and even to purchase foreign government bonds.
In any event, it seems unlikely that the BOJ’s decision will provide more than a breathing space for Japanese banks. It seems increasingly likely that government funds may have to be injected into banks in difficulties. This will be very unpopular with Japanese taxpayers. The Japanese government, if they are forced once again to inject funds into the banks or nationalize failing banks, will need not merely to mollify Japanese voters, but also to make their injection of funds credible, to take other measures to improve efficiency in the financial system. The merger of regional banks must be promoted much harder and the unnecessary proliferation of branches, which makes the Japanese banking system so inefficient, will have to be eliminated. Bank management will also have to be improved and rationalized.
But the banks are not the only problem. More important and more difficult will be decisions on problem loans. Poorly managed and uncompetitive companies, which are only being propped up by loans and bureaucratic limitations on competitors, will have to be allowed to fail. Unless market forces are enabled to force the pace the Japanese economy will never recover properly. The surgical operation needed will be painful, but it will be better for Japan’s future than allowing the economy to undergo a gradual and increasingly depressing demise.
The Japanese government should be concentrating on tackling the necessary fundamental reforms and resisting the pressures of interest groups. Unfortunately Prime Minister Junichiro Koizumi seems to prefer high-profile publicity gimmicks, such as his disastrous one-day visit to Korea, to dealing with his serious domestic problems. One defense of BOJ Gov. Masaru Hayami’s decision is that his aim was to push the Japanese government into taking the drastic steps needed before long-term recovery can be achieved, but his unprecedented decision may already have backfired and undermined such limited prestige as he retains.
In a Sept. 20 leader on the Japanese economy, The Times (of London) concluded that “this unprecedented intervention . . . can only renew the sense that Japan is a country where poorly managed institutions can expect to be propped up by sympathetic politicians and public funds.” (Alas, Japan is not the only country about which this could be said!) “Mr Koizumi’s reputation as a reformer has been tarnished, while BOJ has suffered a serious loss of face and prestige.” These sentiments are hardly open to doubt, but the final sentence seems “over the top.” It reads: “the world’s second largest economy is beginning to look like a banana republic.”
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