We knew that Japan's economic debate was fairly foolish when Prime Minister Junichiro Koizumi told us that structural reforms such as privatizing highway corporations and the post office would somehow revitalize the Japanese economy. But even that looks sensible compared with the latest proposed "reform" -- purging banks to abolish bad loans. Nonperforming loans are a result, not a cause, of Japan's poor economic conditions. Most bad loans are the direct result of bankruptcies and falling asset values since Japan's reform mania began in 1997. Purging banks will create even more bankruptcies, more asset price falls and more bad loans.
Even Koizumi supporters admit some of this. Yet they seem caught up in a semireligious belief that cleansing the financial stables will somehow allow Japan to make a fresh start. Many in the United States thought the same after the 1929 crash, and we know what happened after that.
True, Japan's bad loans were morally repulsive, with money poured into the pockets of gangsters, corrupt politicians and mad speculators for years. But economically they are history. Every economy has large areas of waste -- the military, festivals, official incompetence, excessive welfare, the 40 billion yen being spent on Koizumi's new official residence. But provided the money returns to the economy, the economic damage is low.