[talk] Counter-Deflationary Measures vs. Bad Loan Disposal

Takashi Anzai: President I.Y. Bank

Born 1941. B.A. from Department of Law - Tohoku University in 1963 and joined the Bank of Japan. Worked as: Director of the Niigata Branch, Assistant Director - Operations Department, Director - Bank Examination and Surveillance Dept. and Executive Director. President - The Long Term Credit Bank of Japan in 1998. In 2000, Executive Advisor - Ito Yokado Inc. Current job since 2001.

Sei Nakai: Senior Managing Director - Japan Securities Investment Advisers Association

Born 1945. B.A. from Department of Law -Tokyo University in 1968 and joined the Ministry of Finance. Assumed responsibilities of Consul in New York, Director - Office of Vice Minister of Finance for International, Deputy Director General of Banks Bureau, Senior Deputy Director General of Affairs International Bureau, President of Institute of Fiscal and Monetary Policy of Ministry of Finance. Current job since 2000. Authored "Cynical View on National Finance Administration""

Paul Sheard: Chief Economist -Lehman Brothers Inc.

Born 1954. Currently, Managing Director - Economy Research, Lehman Brothers Inc., Tokyo Office. Ph.D. from the Australian National University. Worked at the Stanford University, Institute of Monetary and Economic Studies - Bank of Japan, Osaka University and more. Committee member of the National Economy Council. Authored "Crisis on Main Bank Capitalism", "Mega-reorganization Corporations"

While tensions mount towards the potential March Crisis, the Koizumi Administration is scheduled to announce its Total Counter Deflationary Measures by the end of February. The whole nation is keeping a closer eye on the package contents as they wonder whether it could stop deflation and dispose of bad loans at the same time.

Dr. Paul Sheard is afraid that the Counter Deflationary Measures might end up as a political show to merely ease market anxiety with no substantial changes and the fundamental solutions could be shelved again. He believes that the Prime Minister should, in a preventive manner, approve public funds supplied to banks to avoid a banking crisis, as it seems inevitable that the crisis will become visible in April when the full protection for bank deposits will be revoked.

Mr. Takashi Anzai stresses that the realities of banks' non-performing loans and corresponding internal reserve need to be disclosed to the public and the market, as the market no longer trusts the banking industry. This can be achieved through an in-depth self-assessment by banks and a special inspection by the Financial Services Agency. The government should decisively inject public funds to the poorly performing banks with low capital equity.

Mr. Nakai warns that the current laws do not allow us to provide a blanket supply of public funds to all banks before March even though some say it is one way to ease the market uncertainty. The Bank of Japan should make contingency loans to the banks to boost their interim cash flow. As long as a cooperative working relationship between the central bank and the Financial Services Agency is demonstrated to the market, the crisis will never take place. He recommends that counter-deflationary measures be given priority over the NPL disposals in order to first destroy the downward spiraling cycle where deflation accelerates the creation of new bad loans.

Participants also argue about specific measures to supply public funds. Dr. Sheard believes that the RCC (The Resolution and Collection Corporation) should play a key role in recovering bad loans from banks rather than directly giving funds to weak banks. The RCC should buy-out bad loans at the book value and the government-guaranteed bonds should be issued to offset deficits. Mr. Nakai feels that this strategy would be a political blunder, as it would be perceived as a bailout of troubled banks using tax money. Mr. Anzai however, believes that any of these options would take a considerable amount of time and therefore the key to ultimate success lies in Prime Minister Koizumi's political decisiveness and his government's accountability to the public.