Japan's government this evening released a substantially diluted plan to rid the nation's banks of hundreds of billions of dollars in bad loans, damaging the reformist credentials of Prime Minister Junichiro Koizumi while blunting his latest attempt to eradicate the financial problem at the center of his country's decade-long economic malaise.
The blueprint aims to eliminate half of Japan's bad loans -- estimated to total more than $400 billion by the government and more than twice that by private economists -- over the next three years. It would force banks to more strictly account for questionable loans, setting aside more money in anticipation of having to write them off. But the plan specifies no date for the accounting changes to take effect. It falls far short of stricter proposals contained in an earlier draft that would have in effect nationalized some of Japan's largest banks and allowed the government to force changes in their management and lending practices.
The markedly softened plan reversed the recent policy direction of the world's second-largest national economy. Only a month ago, after Koizumi's elevation of maverick economist Heizo Takenaka to oversee banking reform, the government seemed intent on finally forcing its banks to turn off the taps to its most deeply indebted customers, allowing the insolvent to fail. Instead, analysts tonight pronounced the plan a sign that Japan has returned to its traditional strategy of muddling through while hoping that economic growth can eventually resume without a painful restructuring.
"We are now looking at a continuation of the procrastination of the past decade," declared Richard Jerram, an analyst with ING Barings Securities (Japan) Ltd. in Tokyo who had previously been optimistic. "Koizumi and Takenaka appear to have caved in to pressure on banking reform. These omissions mean that we can probably consign the rest of the package to the dustbin."
At a press briefing, Takenaka strongly rejected characterizations of the program as a step back from his aggressive stance. "We are shifting to a new financial system in one great stretch in just one month," he said. "The question is how you implement it. This is only a start, but I think this is a good start."
The plan, which has already gained the tacit support of the ruling coalition in Japan's parliament, does endorse in general terms injecting public funds into banks that lack adequate capital -- an action that would amount to Japan's third public bailout of its banks in the last four years. But it left the details unspecified. Most important, it omitted a specific date for implementation of a crucial provision that would force the banks to stop counting anticipated tax refunds as capital. That change alone would significantly slash the amount of capital the banks can claim on their books, dropping the shakiest of Japan's lenders below acceptable international standards and forcing them to accept public funds.
As analysts tonight digested the details, they were more interested in what was not in the plan than what was. They were particularly struck by the absence of strong language giving the government controlling stakes in banks that require an injection of public money. Japan's two previous bailouts, in 1998 and 1999, which together cost taxpayers more than $75 billion, left management largely intact at major banks. Today, the balance sheets at most of those banks are in worse shape than ever.
The watered-down plan was taken by many analysts as proof that Koizumi and Takenaka have been defeated by the major factions in the ruling Liberal Democratic Party, which have for weeks been organizing opposition to the upcoming reforms. The stricter measures would have stopped loans flowing to Japan's heavily indebted construction companies, forcing bankruptcies and layoffs. The ruling party has long depended on the campaign contributions and get-out-the vote muscle of the construction industry.
"The plan has been emasculated," said Koyo Ozeki, a banking analyst at Merrill Lynch & Co. in Tokyo. "It's very unfortunate. The whole deal underscores how strong anti-reform forces are."
Under the plan, the government would create a new entity to lend money to troubled businesses to try to turn them around -- a proposal derided by some analysts as a clear step backward because it probably would keep deeply indebted "zombie" companies alive, soaking up capital that could be lent to new businesses.
"There's a high probability that the proposed entity will become a way to prop up problem companies," said Mitsuhiro Fukao, a former Bank of Japan official and economist at Keio University.
Koizumi also announced measures designed to soften any blow from it. He said he would propose an $8 billion tax-cut package in a bid to encourage consumers and businesses to start spending to get the economy moving again and reverse deflation.
The Bank of Japan also announced it will add cash to the banking system to help ease the process of bad-loan disposal.
Only a month ago, Takenaka's appointment to head the Financial Services Agency was greeted by many global investors as a sign that bold reforms were on the way. In an interview only days after his appointment, Takenaka declared that no companies would be deemed too big to fail, raising the prospect of an unpleasant but unavoidable wave of bankruptcies and job losses.
That comment boosted confidence in Japan's government among some observers, particularly in the Bush administration. But in Japan it produced fears of a great wave of layoffs. The Tokyo stock market dropped to levels not seen in nearly two decades as investors pondered the prospect of huge bankruptcies.
Those fears appear to have given the conservative wing of the ruling party the tool they needed to beat back the tough reforms.