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Thursday, October 24, 2002


News from Japan these days is contradictory. There seems to be no consensus whatsoever about whether Takenaka and his team of 'hard landing' specialists are going to get the political backing they need. Risking a revolt in his own party, Japanese Prime Minister Junichiro Koizumi has today ben giving the appearance of standing firm in support of his besieged banking regulator, amidst heavy signalling from the Bank of Japan that it would operate monetary policy to try to help ease the pain of the tough-love reforms being proposed. Of course the consequences for all of us should the Takenaka proposal prosper are far from clear ( See: WILL HISTORY TREAT THE NAME TAKENAKA THE WAY IT ONCE TREATED YAMOMOTO, blogged Saturday October 5, 2002).

The critical nature of Japan's situation can be sen from the fact that when the names of the reform task force (especially that of Kimura) were made public the Nikkei crashed to a 19 year low, the market then began to slowly recover as things went quiet, and no that there's real talk that the reforms may be sidetracked, well, the market is going back down again. This seems to suggest that Japan is near to going critical, and for this reason my guess (and it's only a guess) is that the reforms will go forward. So watch out.

Japan's ruling Liberal Democratic party on Tuesday appeared to have staged a last-minute rebellion against plans to deal with the country's troubled banking sector, accusing Junichiro Koizumi, prime minister, of pursuing a "unilateralist" and economically damaging strategy.The Financial Services Agency was forced to postpone the announcement of its plan to accelerate the disposal of banks' non-performing loans, citing "political reasons". It would release details of its plans in the next few days, it said.

There had been speculation ahead of the announcement that Mr Takenaka would issue a much watered-down version of his plan because of strong political opposition from those who say a hard landing could tip Japan into economic crisis. But legislators were clearly still uneasy about some aspects of the plan. Attention has focused on possible proposals to deal more strictly with the categorisation of bad loans as well as to reassess what banks can count as capital. In particular, a proposal to deal more strictly with deferred tax assets - potential tax refunds counted by banks as Tier 1 capital - could have a devastating impact on some of the country's biggest banks. If banks' capital adequacy ratios fell below international requirements of 8 per cent as a result of such changes, they
would be exposed to a possible enforced injection of state funds and nationalisation. Mr Koizumi said that an injection of state funds was not fundamental to improving the health of banks, but could result from a stricter categorisation of bad loans.Until last month, when the Bank of Japan called dramatic attention to the lingering banking crisis, the FSA and the banks were adamant that they could write off bad loans by 2004 from profits.
Source: Financial Times

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