Japan:
Government Unveils Economic Proposals

The government February 27 unveiled a package of economic proposals intended to help combat stubborn deflation and address the heavy burden of bad loans held by Japan's banks. The plan urged the Bank of Japan, the central bank, to ease monetary policy, and called for closer auditing of banks' nonperforming loans. The plan also urged the Resolution and Collection Corp., an agency established to buy bad loans from banks, to accelerate those purchases. [See 2002 U.S. President Bush Visits Japan, South Korea, China; Addresses Concerns Over North Korea]

As an effort to buoy stagnant Japanese stock prices, the package also proposed restrictions on "short-selling" stocks, or borrowing them to sell with the hope of buying them back at a lower price.

Most analysts characterized the package as a restatement of long-standing government policies. Bank of Japan officials, amid leaked reports of the plan's contents, February 26 had said that deflation was not a matter of monetary policy. That sentiment was echoed by critics who said that deflation could be fought only by measures that would stimulate economic demand, such as tax cuts or increased government spending.

However, the Bank of Japan February 28 annouced that it would increase its monthly purchases of long-term government bonds by 25%, to one trillion yen ($7.4 billion), a move intended to increase the liquidity of money markets.

The plan also failed to include any measure to force banks to foreclose on delinquent borrowers, as U.S. President Bush had been urging Japanese Premier Junichiro Koizumi to do in the run-up to a recent visit to Japan. Japan's Asahi Shimbun newspaper February 28 reported that in a private letter to Koizumi dated January 17, Bush had expressed concern that "nonperforming loans and assets are not being moved quickly to the market" so as to "free up the capital" for profitable uses.

The proposal said the government was prepared to provide capital injections to banks in danger of insolvency. Bank of Japan Governor Masaru Hayami February 28 urged the government to go further and provide capital funds to banks by the end of the fiscal year March 31. Some analysts said that banks were slow to write off bad loans because doing so would leave insufficient levels of capital on their books.

Critics of the proposals also included prominent members of Koizumi's own Liberal Democratic Party. Party policy chief Taro Aso February 27 called the package "insufficient." Makiko Tanaka, an advocate of reform who had recently been dismissed as foreign minister by Koizumi, said that the premier had betrayed his promises to carry out fundamental economic reforms, saying that he "has joined the conservative, antireform group." [See 2002 Japan: Koizumi Names New Foreign Minister]