ANALYSIS-Sceptics unmoved by Japan policy steps
03:14 a.m. Jul 01, 1998 Eastern
By Linda Sieg
TOKYO, July 1 (Reuters) - Japanese policy-makers might be forgiven if
they feel like Sisyphus, a mythical king condemned to repeatedly roll a
huge stone up a hill, only to see it roll down again each time he neared
the top.
Under pressure from financial markets and trade partners, ruling
politicians -- who in the spring did a 180-degree reversal on tight
fiscal policy -- are now finalising a plan to help consolidate the
nation's bad loan-laden banking system.
Liberal Democratic Party politicians are also hinting that a broad-brush
policy of permanent income tax cuts will be unveiled before key July 12
elections for parliament's Upper House.
So are critics satisfied that a sustainable economic recovery might now
be in sight? Hardly.
''They are certainly moving surprisingly quickly on these things... But
the situation has tended to get worse so they've been on a treadmill,''
said Peter Morgan, an economist at HSBC Securities. ''Six months ago it
would have been great stuff, but the situation has deteriorated so the
base is getting lower.''
A joint LDP-government panel drafting a plan to wind up failed banks
without bankrupting healthy borrowers is set to unveil the scheme on
Thursday, earlier than originally planned.
Japan's critics, including the United States and private analysts, have
said repeatedly that fixing the financial system is vital to ensuring
economic recovery.
Signs are also growing that the LDP may be poised to tell the public it
plans to implement permanent income tax cuts, seen by many as needed to
stimulate economic growth and vitality, before the July 12 poll.
Japan's top government spokesman denied on Wednesday that permanent tax
cuts were a done deal and said the government and ruling party would
launch full-fledged debate after the poll.
A member of the government's tax panel, however, told Reuters that the
LDP would likely come out soon with a statement of intent to cut income
taxes permanently, while leaving possibly contentious details vague
until later.
''They would like to buy the advantage...in the election, and they are
really thinking about the strong advice given by Summers,'' said Haruo
Shimada, a government tax panel member and professor at Keio University.
U.S. Deputy Treasury Secretary Lawrence Summers said this month that
joint currency market intervention to boost the yen had given Japan a
brief window of opportunity to take needed measures on its economy and
financial system.
Economists said the so-called ''bridge-bank'' plan for closing down
failed banks -- a process that could take up to five years to complete
-- was a positive first step but added that many key questions were as
yet unanswered.
The plan is expected to be enacted in an extra session of parliament
after the election.
Key questions include how much and how quickly excess capacity in Japan
's financial system will be cut, to what extent heavily indebted
borrower corporations will be bailed out and whether a 30 trillion yen
financial stabilisation fund set up in February will be sufficient to
cover future losses.
''Even if the government framework is set up, it will take a long time
to decide if it's working,'' said Matthew Poggi, an economist at Lehman
Brothers. ''You have to ask if the government has the resolve to close
down banks.''
Media reports and LDP politicians have said the scheme will take a
two-step approach. First, a failed bank would be placed under government
supervision and Japan's new Financial Supervisory Agency would oversee
liquidation of its bad loans. Loans deemed healthy would be maintained
for up to two years or until a buyer or merger partner is found, the
reports said.
If no buyer or merger partner emerged, the failed bank would be
nationalised under the Deposit Insurance Corp for up to three years,
using a 30 trillion yen fund set up within the DIC to cover any losses
remaining at the end of that period.
''Banking system consolidation will probably progress, but weak firms in
weak industries may be kept in existence,'' said Hiroshi Yamada, an
economist at the Japan Research Institute.
Future permanent tax cuts, meanwhile, might not provide much of a boost
to Japan's economy, which slipped into recession earlier this year, some
economists said.
''The tax cuts would be supportive, but at the end of the day it just
continues current stimulus,'' Morgan said.
Four trillion yen in temporary income tax cuts -- two trillion this year
and two trillion next year -- were already included in a stimulus
package unveiled in April.
High on the list of tasks Japan now needs to tackle, economists say, is
trimming the size of the public sector to reduce expenditures and
eliminate government competition with the private sector.
''Of course one can give them credit for permanent tax cuts, but without
a move to 'small government', even if the economy picks up for a while,
the recovery will not be sustainable,'' Japan Research Institute's
Yamada said.
The government tax panel's Shimada, however, said real debate on that
issue had been ''almost abandoned.''
Authorities also need to cultivate new business sectors to absorb the
growing ranks of workers expected to lose their jobs as uncompetitive
firms in out-dated sectors fail.
''Unless they do that, there will be no place to absorb labour, but so
far, new businesses are not emerging,'' said Susumu Kato, chief
economist at Barclays Capital.
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