I found this article really interesting about just how bad the situation is with regard to Japan's liquidity trap. In it the author suggests that Japan's major banks be nationalized:
news.ft.com
Japan needs radical measures
Avoiding economic meltdown will require temporary nationalisation of the country's banks, argues Graham Turner
This will be the year of reckoning in Japan. The authorities have been struggling to deal with the problems of debt deflation for just over 11 years now. However, land prices are falling faster than ever and the Nikkei 225 index is in danger of setting a new low for the post-bubble era. The recent economic data suggest that Japan will follow the US into recession during the first half of this year. Consumer spending remains dormant, exports are slowing and the problems in the technology sector are likely to cause investment spending to dip in the coming months.
The Federal Reserve is well placed to cushion the economic downturn in the US with a series of deep interest rate cuts. Japan has no such room for manoeuvre. The Bank of Japan, the central bank, could reverse the increase in rates implemented last August but a cut of 0.25 per cent is hardly going to make a difference.
Japan has reached the end of the road on monetary policy and now faces the ultimate quandary for an economy ensconced in a debt trap. The authorities could try another package of fiscal measures but the crowding-out effects that would result might lead them to fail. Higher spending increases the risk that long-term interest rates will rise and not fall. In addition, people in Japan know that the heavy round of spending is merely raising their future tax burden and may just save more.
So what can Japan do? No doubt we shall hear more about monetisation, unsterilised intervention and even inflation-targeting in the coming months. But none of these measures will work. The first two will fail simply because the very definition of a debt trap implies that the demand for money cannot be stimulated by conventional means. Inflation targeting will not work as expectations are by and large adaptive rather than rational in the sense that many monetarists claim. Fear of deflation has become engrained in Japan. Few people will be cajoled into spending more by the announcement of an inflation target. Even negative interest rates are unlikely to work in a largely crime-free society such as Japan's: if there is little crime, few people want to pay banks to look after their money.
All of this suggests that Japan is rapidly running out of options. But it is not. The government should nationalise all of its banks. Japan has lost the opportunity to get real interest rates down to a sensible level now that inflation is deep in negative territory. However, the authorities can provide the debt relief badly needed to stabilise the economy by nationalising the banks.
Banks are the weak link in the system. It is perfectly rational for individual banks to want to foreclose early on companies having trouble repaying their loans. But their collective action is forcing up the pace of bankruptcies and putting downward pressure on land prices. This is exerting more strain on the balance sheets of viable companies and increasing the risk that they too will eventually run into trouble. It is the ultimate vicious circle. After land prices recorded their steepest decline of the downturn during 1999, it came as little surprise when corporate bankruptcies hit a new record last year.
Japan has somehow to stop this rising tide of bankruptcies. The only way is to take temporary charge of the banks and grant an interest rate moratorium to all companies for a temporary period of perhaps three years. The government could then instruct all banks not to push companies into default and not to dispose of any collateral.
The relief felt by workers under threat of losing their jobs may encourage a fall in the savings ratio and trigger a rebound in spending. The absence of unrelenting selling pressure may eventually stabilise land prices and stem the deterioration in balance sheets. The stock market may also rebound as investors conclude there is less chance of companies going into default. Share prices for many companies are trading at distress levels. An end to the credit squeeze would also fuel a more meaningful rally in the stock market than the technology bubble that we saw during 1999.
Such a policy might be rejected on the grounds of cost. But the government could issue IOUs with zero coupons to shareholders. The cost of granting an interest rate moratorium would not be that high. There would be numerous offsets. The banks would have fewer bad debt provisions to declare. There would be less of a drain on tax revenues. The government would not have to fund the cost of bailing out banks once they default, a policy that has already cost a conservative Y60,000bn ($505bn) and still failed to secure a lasting recovery.
Of course, pro-reformers would object to such a policy on the grounds that it would increase the risks of moral hazard. In some sense, this would be right. But now is not the time to be extolling the virtues of Anglo-Saxon shareholder capitalism. Japan faces a potential crisis that cannot be solved by conventional means. It is time for a radical rethink. |
