With the economy still moribund after Prime Minister Junichiro Koizumi's initial round of "structural reforms," we are now told that cleaning up the banking system will save the day.
But bank bad loans are a result, not a cause, of poor economic conditions. Bank policies that aim to put a bottom on declining asset prices would make sense. But "reforms" that seek to purge and punish the delinquent will simply cause more bankruptcies, more asset value declines, more bad loans and more deflation.
Already the government has had to go back on its promises to keep the fiscal deficit below 30 trillion yen. It has had to further postpone its plan to limit liability for deposits at failed banks (the so-called payoff scheme). Almost daily it is being forced into more piecemeal spending increases to prevent more deflation. Like a dog chasing its tail, it is right back to where it started 18 months ago.