Japan's government stepped up the pressure on the nation's banks over their crippling bad-loan problems yesterday, paving the way for possible public fund injections and requiring tougher treatment of indebted firms.
A draft of the keenly awaited bank-reform report obtained by Reuters said that the government would provide "ample" funds to banks if the risk of a financial crisis arose and would consider doing so at an even earlier stage.
But the report took a softer stance on some controversial issues, such as taking a harder look at banks' capital, underscoring the view that chief bank regulator Heizo Takenaka was forced to tone down some of his more radical proposals amid stiff political opposition.
"When necessary, we will inject ample public funds without hesitation under existing Deposit Insurance Law," read the draft of the report, the product of weeks of political wrangling.
"In order to put an end to the non-performing loan problem while securing stability of the financial system, we will consider the need to set up a new system to enable swift injection of public funds and prepare legislation if necessary."
The banking plan, along with "safety net" steps to cushion the impact on the fragile economy, were due to be announced in detail later last night, ending weeks of uncertainty.
The Bank of Japan earlier laid the groundwork for a new banking regime by further relaxing its super-loose monetary policy after a one-day policy meeting, expanding its bond buying and taking steps to provide more liquidity to the market.
"There is certainly a risk that dealing with non-performing loans will result in an increase in corporate bankruptcies and unemployment in the short run," the BOJ's nine-member policy board said in a statement.
The draft of the bank report proposed requiring banks to use a "discounted cash flow" method for assessing loans to big troubled borrowers, one of Takenaka's key aims.
Borrowers' ability to generate profits would be taken into account when assessing loan quality, pressuring banks to raise their loan-loss reserves and get tough on delinquent firms.
The draft also urged a stricter audit of banks' use of tax deferred assets as part of their core capital. This stance is a step back from an earlier proposal that would have limited the banks' use of such expected tax refunds as part of their capital.
The policy package aims to transform a banking system that worked splendidly in rebuilding Japan's economy from the rubble of WWII but which is now paralyzed by dud loans that some experts think could be three times the official figure.
Many conservative politicians, mindful of debt-riddled construction, property and real estate firms at the core of the ruling party's power base, oppose the reforms and say they would trigger mass bankruptcies, layoffs and stock price falls.
The Bank of Japan said it would raise the amount of long-term government bonds it purchases each month to at least Japanese Yen 1.2 trillion (US$9.75 billion) from Japanese Yen 1 trillion now.
It also expanded the current policy framework known as "quantitative easing," whereby it floods the money market with liquidity in a policy that has kept short-term interest rates to near zero since March 2001.
The BOJ said it would increase its target for the balance of current account deposits that banks keep at the central bank to Japanese Yen 15-20 trillion from the current Japanese Yen 10-15 trillion.
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