The emergency economic package unveiled on Friday by the Liberal Democratic Party (LDP) and its allies once again saw a refusal to embark on major structural reform and passed the responsibility to sort out the crisis onto the Bank of Japan, say analysts.
With the de facto resignation Saturday of Yoshiro Mori, reform hopes will now hang on who will succeed him as LDP president and prime minister.
Among the catalogue of financial, legal and regulatory measures, the clearest message that emerged was the pressure exerted on the central bank for a qualitative relaxation of monetary policy.
"The Bank of Japan says that it expects a series of reforms in a number of areas," explained Robert Alan Feldman, chief economist with Morgan Stanley Dean Witter in Tokyo. "The LDP is telling them: `We are not going to play that game, we want you to do everything,'" he said.
While the central bank in principle enjoys complete independence, which is guaranteed in law, the leaders of the conservative coalition did not hesitate to pressure it "to keep pace with the government's economic policies" as well as pushing for the "further promotion of monetary easing" and "setting targets on stabilizing prices".
Since its decision last August to abandon the policy of zero interest rates, the Bank of Japan has come under a barrage of fire from LDP politicians.
There have already been two successive cuts in rates this year. But the bank has expressed its scepticism over the efficiency of quantitative easing or inflation targeting while increasing the tone of its calls for structural reforms.
For Feldman, the only "good news" is that the LDP plan recognizes there is no more public money available. Finance minister Kiichi Miyazawa caused a storm last week when he predicted that the country's finances were "on the verge of collapse".
In its program, the LDP also called for the government to put into practice a battery of tax incentives to help the stock exchange recover. The Nikkei index, which closed at near 40,000 points in December 1989, had fallen back to 12.261 by March -- its lowest level since July 1985.
"The politicians are suggesting they don't know what structural means," said Dick Beason, a strategist with finance house UBS Warburg. "They should talk about the whole tax system, not just a hit-and-miss affair."
More seriously, some of the recommendations contained in the programme seemed to work against the stabilization of the financial system and of the restructuring of enterprises which is seen as indispensable for Japan to rekindle the engine of growth. Contrary to expectations, the plan is very vague on incentives for banks to liquidate non-performing loans. "It is not clear how much incentives banks will have to speed up bad loan write-offs," said Peter Morgan, senior economist with HSBC.
Confronted by the prospect of senatorial elections in July, the LDP is dreading that the cleaning of bank balance sheets does not lead to a torrent of corporate bankruptcies, when unemployment is already at a record high level.
Another LDP idea is to create private investment funds which would buy the cross-shareholdings currently discharged into the market by banks and corporations alike. While weighting on the Nikkei index, this trend is regarded as a structurally positive development that will unravel the cosy relationships of "Japan Incorporated."
"The devil is in the details," said Robert Feldman of Morgan Stanley.
"Will the funds be able to buy the stocks at a special price, who is going to pay in case there are losses, what will happen with the voting rights?" he asked. "If the voting rights stay with the banks, it is meaningless," he said, adding that the "key issue is who controls the corporate governance?"
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