Japanese economy needs prompt rehabilitation

The Asahi Shimbun, Tokyo

Even the dullest economic mind can clearly grasp the need for Japan to clear away its hulking mound of bank bad debt to rehabilitate the ailing banking system and give the economy the necessary financial lubrication to get the wheels turning smoothly again. But little headway is being made in this effort so vital to the nation's economic renewal.

The scheduled announcement of a government program to eliminate the bad loans put together by the special task force of economy and financial services minister Heizo Takenaka has been postponed because of strong objections from within the ruling Liberal Democratic Party. The drastic proposals could be a painful blow to banks and their big corporate borrowers, but the LDP critics say the Takenanka program doesn't offer sufficient measures to cushion the shock.

The critics are right to argue that the government needs to minimize the negative impact-such as bankruptcies and unemployment-associated with cleaning up the bad loans. But objecting to the Takenaka task force program because it contains no effective "safety net" reeks of an LDP plot to force more public works spending and generate a supplementary budget, delaying the more painful but necessary action.

If such stalling persists, the nation's economic health will only worsen. The government should act quickly and decisively to eliminate the bank bad loans and apply comprehensive cushioning.

The recent Bank of Japan decision to acquire corporate shares from the big banks battered by plunging stock market prices was the central bank's declaration of a state of financial emergency. Over the past dozen years or so, the tumbling market has wiped out all the unrealized gains in bank stock portfolios. Although the central bank has flooded the financial system with liquidity, the money flow has been stalled because the financial pipes are clogged.

The Financial Services Agency and bank executives insist the banks are in good health, but shareholders, depositors and the marketplace are not reassured by that declaration. The economy is being choked by the widespread doubts about the financial system, which suffers from a crisis of credibility that only adds to the deflationary downturn.

The Takenaka agenda calls for a stringent assessment of bank portfolios and the quality of their assets. The government first must make sure banks will maintain sufficient reserves against loan writeoffs and then write them off, even if at a loss. In some cases, banks will be short of capital through this process, in which case the government should inject public money, if necessary, to supplement the capital base.

The government has a duty to hold bank executives accountable for putting their institutions into such a mess and force the banks it rescues to submit to what amounts to nationalization.

Only when people believe the nation's banking system has outgrown its negative legacy, will Japan's banks be able to recover competitiveness and start performing the functions that are essential for the economy.

Mikio Aoki, the LDP's Upper House caucus leader, has challenged Takenaka to bear full responsibility for the consequences of his bank cleanup proposals, including further stock price declines. But that challenge should have been directed at Prime Minister Junichiro Koizumi.

The stock market's present weakness is a grim consequence of years of stopgap measures, while shirking a radical cure to the nation's economic ills. The only way to effectively lift sagging stock prices is to proceed resolutely with bad-debt disposal.

Koizumi has said he will support Takenaka's policy initiative. But he seems disquietingly aloof to this crucial task. If Koizumi still has any interest in remaking the LDP, as he once promised, he should show he is ready to bear the brunt of criticism for tough choices and pursue the bad-loan disposal as an urgent task that can be put off no longer.