Japan approved measures aimed at stamping out deflation, including using the state-run Resolution and Collection Corp to buy more bad loans from banks and making it harder for investors to profit from betting shares will fall.
In an admission the measures won't have any immediate effect and need to be bolstered by more action, Economy Minister Heizo Takenaka said it may take another two years to beat deflation. That may damp hope that legislators are prepared to force banks to cut off bankrupt companies and clear bad loans that are choking credit.
"They are kidding, right? This `proposal' adds up to less than nothing," said Carl Weinberg, chief economist at High Frequency Economics in Valhalla, New York. "So even our low expectations are going to be disappointed."
In a sign it's business as usual in Japan, UFJ Holdings Inc, Sumitomo Mitsui Banking Corp and Mizuho unit Fuji Bank Ltd. agreed to ?520 billion (US$3.9 billion) of debt relief to help retailer Daiei Inc stay in business. The yen held near a three-year low.
"You can't solve such a deep deflationary problem with just marginal policy changes," said Richard Jerram, chief economist at ING Barings in Tokyo. "If you're really changing policy to fight deflation, then you need to take a clean sheet of paper and start over." The plan, approved by Prime Minister Junichiro Koizumi's top economic panel, said funds will be injected into banks only if the government deems there's a financial crisis, and didn't contain any initiatives to spur consumer spending. Instead, the government repeated calls for the central bank to take "drastic steps" to help stop 2 1/2 years of price declines.
The government has targeted the ?36.8 trillion of loans that aren't being repaid as the key to breaking deflation's grip on the economy. The mountain of bad debt -- analysts say it may be five times the government estimates -- is choking credit, starving the world's second-biggest economy of the fresh money needed to grow.
The RCC will set up a committee with banks to speed the purchase of bad loans and hire more staff to strengthen its ability to turn around insolvent companies.
Small and mid-sized companies that can't secure loans from banks will be allowed to tap the state-run Shoko Chukin Bank for up to ?30 million in unsecured loans, the government said. Banks will also be encouraged to lend to financially sound small companies.
Short Sellers Targeted Japanese investors today welcomed the move to clamp down on traders who profit from betting shares will decline and who officials have blamed for the sending the benchmark Nikkei 225 stock average to an 18-year low earlier this month.
The Nikkei jumped 3.6 percent to a seven-week high 10,573.09 today. The broader Topix index rose 2.4 percent, with Mizuho Holdings Inc and other banks made up making up more than a tenth of its gain.
The government said the Securities and Exchange Commission will increase the number of inspectors monitoring short-sellers by 50 percent, to 61, to catch investors who violate the restrictions.
The Financial Services Agency will ask financial institutions to review fees they charge to lend stock to short-sellers, suggesting it wants them to charge more to make short selling less profitable.
The government wants to reverse a 30 percent slide in the Nikkei since Koizumi came to power 10 months ago. Banks have to value shares they own when the fiscal year ends March 31 at market, rather than historical prices, and there's concern some lenders may have more liabilities than assets when they account for the drop in stocks.
The government didn't free up more money for banks to shore up their capital, saying only it will take "any measures needed" to prevent a financial crisis. The Financial Services Agency should complete its inspection of the nation's lenders by March 31 and immediately release the results, the government said.
If Koizumi is serious about ending deflation, he should abandon his self-imposed ?30 trillion cap on new bond sales to regain some flexibility in policy, said ING's Jerram. That would allow him to suspend the 5 percent sales tax or offer income tax credits to spur consumer spending.
The government should also legislate an inflation target for the central bank and impose penalties if the target isn't met, he said. It should also close weak companies and accept the job losses that would ensue.
That's unlikely to happen because job losses are anathema to a government that's tried to hold Japan Inc. together through an 11-year economic slump by propping up insolvent companies and using taxpayers' money to bail out banks.
The government's call for further policy easing from the central bank may fall on deaf ears if Governor Masaru Hayami isn't convinced legislators are doing enough to stamp out deflation.
While 21 of the 23 economists, investors and traders surveyed by Bloomberg News expect the bank to do that when its policy-setting board meets tomorrow, nine said the bank will act only if the government releases convincing measures to fight deflation.
Signs of a rift between the central bank and the government may shatter investor confidence that policy makers can avert a deflationary spiral where prices, wages and incomes all decline.
"If the BOJ stands pat, then that would signal Japan's policy makers are lacking solidarity," said Yasunari Ueno, chief economist at Mizuho Securities. "That may send a negative signal to investors and hurt Japan's stock market very badly."
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