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Sunday, May 18, 2003

Japanese Bank Bailout

The decision to inject an estimated $17.7 billion into Japans fifth largest bank has set-off all manner of questions about the future of the 'reform' process, including questions about the survival of key economics minister Heizo Takenaka whose attempts to accurately reclassify the book value of bad debts are thought to have provoked the capital adequacy problem. On the back of the latest GDP deflation figures, the pressure certainly seems to be building up.

Anxiety about the state of Japan's banks, rekindled by the government's weekend decision to bail out the nation's fifth-biggest banking group, has turned up pressure on the administration to kill profit-destroying deflation. The rescue of Resona Holdings also reignited calls to oust Financial Services Minister Heizo Takenaka, an academic closely identified with Prime Minister Junichiro Koizumi's reform agenda and a target of old guard discontent. "Prime Minister Junichiro Koizumi...must do his utmost to prevent the crisis from spreading," the Yomiuri Shimbun newspaper, Japan's biggest, said in an editorial on Sunday. "At the same time, we should not forget Resona's case has been influenced by the hard-line financial reconstruction policy championed by Heizo Takenaka...which has gone astray," the conservative newspaper added. The government said on Saturday it would rescue Resona with a huge injection of funds after tougher accounting rules pushed its capital adequacy ratio below limits needed to do business. Media reports said the infusion of public funds could be as much as two trillion yen ($17.17 billion). Ruling politicians on Sunday generally endorsed the decision. But Taro Aso, policy chief of the ruling Liberal Democratic Party, and others called on the government to address the persistent decline in prices that is likely to get worse as the nation's banks struggle to dispose of an estimated 40 trillion yen ($345 billion) of problem loans now on their books. Aso attributed Japanese banks' dismal situation to declines in the value of real estate, which was used as collateral for many loans in during the late 1980s "bubble economy" and is now a major cause for soured loans, as well as falling stock prices."Asset deflation is the biggest problem," he said.

Aso sidestepped the issue of whether Koizumi -- whose central policy pillar is fiscal reform -- should adopt an extra budget to fund public works as suggested by some LDP heavyweights and their partners in the three-way ruling bloc. "When you are suffering from both diabetes and consumption, you have to treat the consumption first," was all he would say. Koizumi, who meets President Bush later this week for a bilateral summit, also faces international pressure to tackle a four-year slide in core consumer prices. Japan pledged at a weekend meeting of Group of Seven finance ministers in France to step up efforts to fight deflation. But Finance Minister Masajuro Shiokawa offered few clues as to how Japan, burdened by massive public debt, could do so.

Shiokawa said Japan would ensure ample liquidity in financial markets and diversify the way it provided liquidity, although the Bank of Japan (BOJ) already pins interest rates at near zero and floods the money market with far more liquidity than it needs. The central bank is set to hold a policy-setting meeting on Monday and Tuesday. The maverick Koizumi sprang to power in April 2001 on a wave of public support for his agenda of painful reform, including reining in the nation's ballooning fiscal deficit and lifting the heavy hand of government from Japan's long-stagnant economy. Criticism of his policies from within the LDP has been harsh, but some on Sunday urged him not to cave in. Calling for a "comprehensive policy" focusing on deregulation and tax reforms to nurture new business and create fresh demand, the liberal Asahi Shimbun newspaper said the massive stimulus policy adopted after a 1997 financial crisis had inflated government debt without fixing the financial system. "We cannot walk that same path again," the newspaper said. Still backed by about half the nation's voters despite plummeting stock prices and a stagnant economy, Koizumi vowed on Saturday to carry on with his reform agenda. "There is absolutely no change in our reform stance," he said after the government held its first emergency financial crisis council meeting to approve public funds for Resona. "We took measures so that a financial crisis will not occur."

Koizumi, who must be re-elected as LDP president in September to keep his premier's job, stood by his controversial minister. "I have no intention of changing him," he said, when asked about calls for Takenaka's resignation. "He is doing a good job." Resona's call for help underscored longstanding suspicions that Japanese banks have overstated their capital by taking advantage of accounting loopholes. Auditors had declined to sign off on the group's earnings estimates, which were deemed to be far too optimistic. Stock market investors can expect a volatile day on Monday in reaction to the rescue deal if it's perceived that Resona's problems are just the tip of iceberg, analysts said. If bank shares get slugged, the Nikkei average could drop toward the 20-year lows it reached last month -- putting even more pressure on the banks, which have huge shareholdings.
Source: Reuters News

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