Japan announces new plan to curb deflation
By KENJI HALL
TOKYO (AP) - Prime Minister Junichiro Koizumi, seeking to rekindle growth in Japan, has unveiled a new plan designed to end deflation and haul the economy out of its third recession in a decade.
But even before Wednesday's announcement, analysts were skeptical that the revival plan would be enough to relieve the country's economic distress.
Economy Minister Heizo Takenaka, who announced the measures, said the anti-deflation package aims at wiping out bad debt, shoring up the stock market, boosting credit to small businesses and encouraging consumer spending.
Japan is the only industrialized economy that has had to combat deflation, a trend of tumbling prices, since the end of the Second World War. Prices have been spiraling lower for more than two years, undermining corporate profits, slashing property values and increasing debt burdens.
Takenaka said the plan calls for urging the central bank to loosen monetary policy, though it doesn't ask for specific actions. It also authorizes the government's loan-buying agency to speed its bad loan purchases from banks.
To bolster Japan's sinking stocks, the plan promises stricter regulations on short-selling. Short-selling involves selling borrowed stock in a bet that the shares can be repurchased later at a lower price.
Earlier Wednesday the Bank of Japan endorsed Koizumi's plan, triggering an enthusiastic response from markets even as some economists denounced the plan as too vague.
Tokyo stocks rallied sharply on news that Bank of Japan Gov. Masaru Hayami indicated the central bank might flood the system with more money.
By buying more government bonds, the bank would effectively be printing money, making it even easier for banks to lend and for companies to invest in new technologies and production that drive growth.
The benchmark 225-issue Nikkei Stock Average closed up 370.46 points, or 3.6 per cent, to 10,573.09 on Wednesday.
Economists say ending the protracted decline in prices is tricky. Past efforts to halt the trend have failed, leaving Japan stuck in a slump that has lasted more than a decade.
For the average consumer, falling prices have significantly diminished the value of homes, raised the burden of paying interest on debts and discouraged people from buying big-ticket items, such as cars or property, because they know they will be cheaper in the future.
Deflation's impact on corporate Japan is even worse. Falling prices drag down the value of their factories, the land they use as collateral and the worth of their stock portfolios.
The focus of Koizumi's package is the disposal of some $323 billion US in bad debt strangling Japanese banks. It calls for reassessing the size of those loans and urging banks to prod their most indebted borrowers to restructure or face bankruptcy.
One thing the plan doesn't promise to do is immediately pour public money into ailing banks - though it leaves the government the option to do so, if needed.
Jesper Koll, chief analyst with Merrill Lynch in Tokyo, suggested Koizumi is leaning toward letting hopeless businesses fail, rather than propping them up with taxpayer money.
The last time the government used public funds for that purpose was during a 1999 banking crisis, when it shelled out about $56 billion US only to be faced with similar problems a few years later.
"There is no such thing as a magic bullet. But the basic reform thrust is on track," Koll said. "Koizumi's giving capitalism a chance."
But many analysts questioned whether the plan would usher in true reforms, saying it resembles the patchwork policies - and the lack of political will to change - of Koizumi's predecessors.
Until the government comes up with a way to spur consumer spending, any package of measures probably won't spark a sustainable turnaround, said Ryo Hino, an analyst with JP Morgan in Tokyo.
"It's window dressing," said Hino. "They are just leaving options open and making no decisions until they are backed into a corner.
ca.news.yahoo.com |
