Despite the risk of bankruptcies, Japan's economic recovery will be delayed even more if banks do not dispose of their massive pile of bad loans, Prime Minister Juni-chiro Koizumi told Parliament yesterday.
The prime minister strongly defended the need to carry out economic reforms to spur economic growth, but opposition party leaders assailed him for dodging questions and avoiding specifics about his policy plans.
In the most heated exchange, Kazuo Shii, the head of the Communist Party of Japan, slammed Koizumi's recently announced banking reform plan, saying that forcing banks to dispose of the bad loans would lead to a surge in bankruptcies and hurt the economy.
Koizumi, however, reiterated his long-standing reformist position.
"The economy's recovery will be put back even more if we don't dispose of bad loans. This is why we are carrying out the bad-loan cleanup," Koizumi said. "The health of financial companies has a large impact on industry, so we must do this quickly."
Koizumi's administration has argued that, although some bankruptcies may occur, the cleanup is needed to lift the banking industry, and thus the rest of the economy, out of its slump.
Japan's major banks are burdened by some Japanese Yen 42 trillion (US$344 billion) in bad loans that have weakened them financially and lowered their ability to lend to companies and contribute to economic growth.
Koizumi has made clearing the bad loans out of the banking system a centerpiece of his plan for reviving the economy, which has stagnated for over a decade since an asset bubble of inflated real estate and stock prices burst in the early 1990s.
In recent years, deflation has compounded Japan's economic woes by eating away at corporate profits and wages. Persistent price declines have also dragged asset values down even further while simultaneously raising the real burden of debt -- all factors that have helped increase the bad loans on banks' books.
The government has prepared numerous stimulus spending packages and plans to accelerate banks' bad loan disposals over the years, but none has rejuvenated the economy as hoped.
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