Analysis of Japan's "Bank Tax" Rebellion from Stratfor.com,
stratfor.com
This will not help financial stability in Asia.
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Analysis
The local government of Osaka, Japan's second largest city, is set to follow Tokyo's example and pass a tax on bank profits one that will bring in badly needed revenues. The Prefectural Assembly will vote on the proposal May 30, and the major political parties support the measure, according to Jiji Press news agency. Faced with the central government's inability to right the economy, local governments are trying to take care of themselves. But without a unified plan, this proliferating set of independent solutions threatens to multiply Japan's economic problems.
Osaka's Prefectural Assembly is poised to pass a bill that will tax the gross profits, rather than net profits, of banks with more than $46 billion in assets, according to the Mainichi Shimbun. In other words, even banks with negative balance sheets will have to pay taxes. This scheme is expected to bring in $69 million to the debt-ridden Osaka government. The proposal mirrors a law passed by Tokyo?s metropolitan government earlier this spring, expected to raise nearly a billion dollars for the city.
This local insurgency stems from the central government's inability to bring Japan out of its economic malaise. Rather than force necessary structural reforms and rebuild the economy, the federal government has tried to revive the existing system. The government has stuck with a limited repertoire of economic tools, such as massive public spending, bailouts and currency interventions to increase exports. Unfortunately, none of these efforts have been enough to stop Japan's economy from shrinking by 1 percent and 1.4 percent, respectively, in the latter two quarters of 1999.
Local governments are taking matters into their own hands. Decentralization has been discussed for years, but there is now a very real financial incentive for local governments to go it alone. At present, they have little control over their own finances.
New bank taxes are not only a symbol of the growing political independence at local levels. These taxes are the beginning of a larger pattern of local economic independence. Osaka's actions make sense; it is Japan's second largest city and the second largest banking center behind Tokyo. A number of other cities could also benefit by following a similar tack, including regional banking centers like Yokohama, Kobe and Nagoya.
The financial reality of the country borders on the absurd; the Japanese government gives money to banks, which are now taxed by local governments to make up for revenues sent to the central government. The banking system is already reliant on help from the national government, which spent more than $60 billion propping up the nation's top 15 banks in early 1999. This is nearly three-quarters of the $82 billion in bad loans that Japan's banks wrote off last year.
This spells trouble for a banking system already awash in it. Japan's banking sector has yet to become internationally competitive. In some cases, arcane rules allow banks a great deal of leeway. The majority of international banks must have cash reserves equal to 8 percent of their loans; Japanese banks need only 4 percent. About half of South Korea's bank managers lost their jobs in the restructuring that followed the 1997 Asian economic meltdown. In Japan, no managers were sacked, according to the Economist. Meanwhile, Japan's interest rates continue to hover around zero.
Besides helping to expose the country's financial shell game, the bank tax will further hurt the financial system. Already, struggling banks will be forced to use extra revenues to pay taxes, further weakening their financial positions. Higher fees or interest rates can't make up the difference because Japanese consumers are hesitant to borrow money even at 0 percent interest. Some banks may even be forced to appeal to the government for yet another bailout.
The paralysis of Japan's central government has forced local officials to act in their own best interests. Unfortunately, what is good for Osaka increased local tax revenues is not good for Japan, which would like a reformed banking system, but absolutely needs a stable system. Other local governments will likely follow Osaka's lead there's a finite pool of cash to draw from, and nobody wants to be the last to the trough. The result: exponential decay of an already failing system. |
