- The Washington Times - Wednesday, September 25, 2002

In a surprise announcement revealing it was about to reverse policy by 180 degrees and violate the tenets of its 120-year-old tradition and Japanese law, Japan's central bank declared last Wednesday that it would begin purchasing shares of stock from the asset portfolios of that nation's largest banks. Due to the growing burden of bad loans and the economy's intensifying deflationary and recessionary pressures, many of those banks already are on the verge of collapse. Their condition is unlikely to be improved amid an already-shaky economic environment to which the Bank of Japan has just added a huge dose of moral hazard. What the central bank publicly describes as bold action appears to be merely its own foray into the realm of pie-in-the-sky quick fixes, which have repeatedly failed to resolve Japan's banking crisis.
It was an act of desperation that one might expect from a country whose debt rating had been downgraded below Botswana's in June as Japan's rating had been and was about to be deservedly downgraded yet again. In fact, the action seemed so desperate that Bank of Japan Governor Masaru Hayami, who for years had been imploring the government to pursue the structural reforms necessary to revive Japan's recession-prone economy, did not even bother to give advance notice to the government's economy minister.
Adding to the chaos, Prime Minister Junichiro Koizumi, the nation's increasingly disappointing leader, failed to meet his self-imposed Friday deadline to unveil anti-deflation policies. On the same day, as it happened, the Japanese government for the first time even failed to entice enough buyers to purchase less than $15 billion of its benchmark 10-year bonds. It was "the kind of thing that happens in Argentina or Cameroon," noted the chief economist of High Frequency Economics. Indeed, Japan's public debt now approaches 150 percent of its gross domestic product (GDP), by far the highest level of any industrialized developed economy.
For years, Japan's elected officials have been in complete denial about the extent of their ever-worsening banking crisis. Officially, the government acknowledges about $350 billion in bad loans, or about 8 percent of GDP. But some analysts estimate the real total of bad assets mired in Japan's financial system may be closer to 20 percent of GDP. (By contrast, the U.S. savings and loan crisis generated losses of less than $150 billion, or about 2 percent of U.S. GDP.) Rather than quickly write off the worthless loans, fire incompetent corporate managers, close insolvent banks and companies, and restructure and deregulate its failed interlocking keiretsu system, Japan instead has tried one fiscal or monetary quick fix after another. These half measures have produced an unsustainably large budget deficit, unprecedented debt levels and zero short-term interest rates incapable of recharging its economy.
Today, Japan seems utterly helpless in combating the deepening deflationary pressures that are intensifying the economic crisis that began more than a decade ago, when the stock-market and real-estate bubbles burst. Meanwhile, the bad news seems to keep getting worse. The government recently reported that land prices declined for the 11th year in a row; and the Nikkei stock index has lost 75 percent of its value from its peak. Unfortunately, with Japan's elected officials unable to take bold action, last week's desperate gambit by the Bank of Japan is unlikely to offer any long-term relief.

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