GUATEMALA CITY — Japan’s Nikkei average is below 8,000 for the first time in 20 years, putting it 80 percent below its 1989 high. A fall in the Nikkei below 7,500 could mean that some Japanese banks would not meet their international capital adequacy requirements.
At a time like this, leaders must avoid the temptation to pursue policies that yield short-term political benefits while leading to long-term economic losses. Alas, few politicians have the guts to accept short-term political costs in exchange for long-term economic gain.
And so it is that Japan’s leaders are showing inclinations to intervene even more in over-regulated markets with coordinated interventions to offset selling in the stock market. In a misguided move last year, regulators set new restrictions on short-selling. Now, pressures are likely to be put on the Bank of Japan to purchase more bank-held stocks to offset falling share prices and ease the impact of market fluctuations on banks’ capital bases.
At the same time, the Bank of Japan will be under pressure to ease its credit stance and inject more liquidity into the money market. But the BOJ has tried to halt deflation by pumping up the monetary base through monthly purchases of Japanese government bonds worth up to 1.2 trillion yen ($10.3 billion). The aim was to hit its target for the balance of current account deposits to keep them in a range between 15 trillion yen and 20 trillion yen.
Despite these increases in monetary growth, the country’s dysfunctional banking system has meant that the extra liquidity has not found its way into the economy. Despite an expansion in the monetary base by 40 percent since March 2001, the growth in broad money supply has increased by only 6 percent. Clearly, this approach is not working.
Meanwhile, the BOJ has set a 2 trillion yen target for purchasing bank-held shares to assist in unwinding cross-held shares by financial institutions and weak corporations before the March 31 book-closings. As of this week, BOJ purchases of bank-held shares amounted to 906 billion yen.
In an unprecedented move, the BOJ began buying shares from commercial banks in November through a trust bank. In the United States, it is illegal for the Federal Reserve to own stocks. This move by Tokyo is equivalent to “nationalizing” a significant portion of outstanding shares.
As of September 2004, the limit of the value of commercial banks’ shareholdings in other companies must be less than their primary capital. With Japanese banks being required to reduce their cross-shareholdings, selling by financial institutions has contributed to the downward pressure on share prices.
But now the worry is over whether the BOJ can maintain the soundness of its assets. The BOJ is dangerously exposed to falls in asset prices since its holding have more than doubled over the past five years. Alongside the growing portfolio of stocks is a large stock of government bonds. Both could easily be worth less than what was paid for them, especially when interest rates inevitably rise or inflation begins to creep up.
Using public funds to buy shares can only have a temporary effect on keeping stock prices up because stock prices reflect investors’ feelings about how current economic conditions will affect future profitability of companies. In all events, stock prices are a passive, not an active, component of the economic process.
It is bad enough that using public funds for stock-market intervention only creates temporary impression of improved conditions. But these actions worsen economic conditions in the long run when methods, like those selected by Tokyo, interfere with the determination of the real value of stocks by the market. There is also the certainty that allowing capital to be left in the hands of zombie companies and badly run banks will create distortions in the economy that will take many more years to sort out.
It is unlikely that the BOJ expects its positions in companies to be held for long. If announcements of selloffs are made public, share prices are likely to be pushed down. But stealth sales will involve special deals to privileged brokers and be open to corruption. In all events, it will be difficult to dispose of the shares in a straightforward manner.
In all events, many other things can be done before stock-market interventions are justified. One way to encourage share buying in a slumping market would be to change regulations in both countries.
Instead of taking steps toward nationalizing the local stock market, Tokyo should consider removing obstructions or reinforcing incentives for private investors to enter and remain in the market. Reducing taxes on stock transactions would encourage a long commitment to shares and help stabilize stock prices. It would also be advisable to cancel completely the capital-gains tax on equities in force since 1989.
Tokyo’s policy initiatives require putting savers’ and taxpayers’ funds at risk while also playing games with retirement funds. These steps involve short-run remedies that will not solve long-term structural problems. In fact, meddling with stock markets only delays the unavoidable adjustment costs associated with corporate restructuring, a key goal of the current administration’s election platform.
Bureaucrats and politicians should remove regulations and tax disincentives that discourage long-term investments in stock markets. In so doing, they would put their economies on a more secure and sustainable economic growth path.
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