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To: ms.smartest.person who wrote (727)	11/13/2001 4:55:48 PM
From: ms.smartest.person	Read Replies (1) \| Respond to of 5140

LEX COLUMN: Koizumi's challenge LEX COLUMN Financial Times, Nov 12, 2001 When Junichiro Koizumi became Japan's prime minister the market cheered. It is apparent, however, that Mr Koizumi is not going to dig Japan out of its decade-long economic malaise. The problem is less opposition from Japan's old guard than the policies themselves, inadequate to deal with Japan's problems. Japan suffers from lack of demand, not lack of supply. Supply-side reforms, including deregulation and privatisation, are badly needed to improve productivity growth. But they will do nothing to increase utilisation of Japan's existing capacity. Fiscal consolidation will make matters worse. Public spending, however inefficient and wasteful, has kept Japan's economy from sinking into outright depression. Sticking to the promised Y30,000bn debt ceiling next fiscal year in the face of a synchronised global recession would be rank folly. Thankfully, no-one expects Mr Koizumi will. Cleaning up Japan's banking sector is much more pressing. Weak banks restrict the flow of credit to borrowers, and reduce the effectiveness of monetary policy. But even here, the government's emphasis is misplaced. There is limited evidence of unsatisfied demand for money from worthy borrowers - if so loan rates would surely go up. Japan's problem is that its entire corporate sector is stuck with negative equity, after the asset bubble burst a decade ago. Companies are paying down debt rather than investing; in aggregate that weakens the economy, further depressing asset values. In a normal credit cycle, companies eventually pay down debt to reasonable levels, and start investing again. But when prices are falling, as in Japan, the real value of debt goes up, and companies have to run to stay still. Japan needs a Chapter 11-style debt restructuring, underwritten by public money (which may mean temporarily nationalising many banks). Instead, the government persists in the fantasy that the banks can raise enough capital themselves. Serial delinquents in the construction, retail and financial sectors should be closed, and their assets sold. But elsewhere the emphasis should be on debt/equity swaps coupled with some debt forgiveness. Even then, Japan would have to tackle deflation. There is little demand for credit because real interest rates are too high - about 2 per cent. The Bank of Japan can create inflation through unorthodox means, if it is prepared to go far enough. An inflation target alone would lack credibility; what is needed is large scale repurchases of government debt, followed if necessary by corporate bonds, equities, foreign assets and land. The Hong Kong Monetary Authority (albeit in very different circumstances) bought securities without creating crippling distortions in the economy. Once growth and inflation return, the government could get on with the supply-side agenda. But in the absence of a U-turn by Mr Koizumi on public spending, and/or the BoJ on monetary policy, foreign investors should remain underweight Japan. Doubly so, since any solution to Japan's woes will probably involve a depreciation of the yen. Long-term Japanese investors should increase exposure to foreign assets. Rarely has capital flight seemed more attractive. globalarchive.ft.com Copyright: The Financial Times Limited 1995-1998