Japan Brief / FPCJ, No. 0864

October 16, 2008

Japan Alerts itself to Probable Hard Times Ahead as Global Recession Looms

Tokyo share prices rebounded dramatically on October 14 as did other stock markets in Asia and Europe in the wake of European government’s decisive action over the weekend to keep major banks afloat and stabilize financial markets. The Nikkei stock average shot up 1,171.14 points or 14%, the sharpest single-day surge ever, after nightmarish plunges in the preceding week. But the nation remained in a weary mood in view of growing prospects of a deep global recession.

Finance Minister Shoichi Nakagawa told the upper house budget committee that “the Japanese economy suffered from the bursting of a bubble and struggled with the problem for more than 10 years before it managed to overcome it. Its foundation is solid and its financial system, in particular, is healthier than those of the Untied States and Europe.” “But,” he added, “I have been urged by Prime Minister Aso to get ready for whatever may happen.”

The government is moving fast to prepare for any contingency that might arise in the Japanese banking system despite its relative stability. One preventive measure to be taken is to revive and revise a defunct law for injection of public funds into smaller financial institutions. The Law for Strengthening of Financial Functions played its role during Japan’s financial crisis of the 1990s, but was allowed to expire in March 2007 when the crisis was a thing of past.

As the Japanese economy is already believed to be in recession, which is likely to worsen due to global economic slowdown, the authorities are concerned about rising nonperforming loans at some regional banks and institutions that lend to smaller firms, which are feeling the pinch of the deteriorating business environment. If these banks grow reluctant to lend, smaller firms could find themselves even more squeezed. The bad loan ratio averages 3.7% among regional banks, 6.4% at shinkin banks, and 10.3% at credit associations.

The fiscal 2008 supplementary budget, worth 1.8 trillion yen, which appropriates funds for the emergency economic package put together late in August, is certain to pass the Diet soon, but the Aso government is preparing additional stimulus measures in view of the harder economic prospects brought about by the financial crisis. A flat-rate income tax cut on the order of 2 trillion yen, fully embraced by the Liberal Democratic Party, will be part of the package.

Meanwhile, the Bank of Japan decided on October 14 to put into effect additional measures to stabilize the monetary market: removing the cap on the dollar fund it supplies to the domestic money market in coordination with central banks of other countries; expansion of the scope of its buying operation of government bonds from financial institutions; and increased fund supply using commercial papers. Bank of Japan Governor Masaaki Shirakawa said that these measures were in line with the coordinated actions by other central banks. “Quick implementation of the measures is important,” he said.

Media Commentaries
In the wake of the sharp share price rebound, domestic media endorsed in their editorials (October 15) the government’s move to strengthen steps to meet contingencies and argued for even more preparedness.

【Japan should take measures to avert a meltdown】(Asahi Shimbun)
“This time around, Japan’s financial markets have yet to be thrown into major turmoil. There is no guarantee, however, that the impact of the global crisis won’t spread to these shores. Keeping such downbeat scenarios in mind, all available means should be mobilized to head off a financial meltdown.”

【Enhance the effectiveness of coordinated steps put in motion】(The Nikkei)
“It is necessary to prepare a safety net to infuse funds into local finance and take precautionary steps to prevent the fund supply for smaller and minor enterprises from drying up. It is also hoped that quick and adequate steps will be taken in response to any deterioration in the economy.” “Adverse effects the financial crisis will have on the world economy stand to be worse than earlier expected. Internationally coordinated actions will be essential.”

【Stock market rebound not end of crisis】(Yomiuri Shimbun)
“Japan sank into financial recession after the burst of the bubble economy. The financial crisis wore on because banks' bad assets increased even after the government injected more than 7 trillion yen of public funds into major banks in 1999. It took four years from the injection of the public funds until the de facto nationalization of the Resona Group in 2003 marked the end of the crisis. In all probability, further losses and additional financial measures will continue to chase each other in the United States and Europe for some time yet.” “The situation also demands that the government come up with measures to deal with the real economy. It should boldly implement measures--such as investment tax cuts that will spark corporate capital investment and the expansion of loans to small and midsize enterprises--that will have calculable, tangible effects.”

(Copyright 2008 Foreign Press Center / Japan)