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Japan’s Economic Plan Criticized

October 31, 2002

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TOKYO (AP) _ Japan’s new plan to overhaul the economy failed to impress Tokyo investors Thursday, with analysts saying much more needs to be done to shore up the nation’s debt-ridden banks.

Heizo Takenaka, Japan’s reformist minister who oversees the financial sector, announced a plan Wednesday to wipe out at least $325 billion in bad debts that have piled up at banks over the last decade, threatening the stability of the system.

Private analysts say the bad loans could total more than three times the government figure.

Tokyo share prices fell Thursday as the market shrugged off the plan as offering little hope for change. The benchmark Nikkei Stock Average closed down 1.3 percent.

Analysts say Takenaka is on the right track. But what’s lacking, they say, is support from old guard bureaucrats and politicians with vested interests in the status quo.

Takenaka’s plan was to be announced last week but ruling party politicians and powerful ministry officials resisted, fearing its reforms were too severe.

The announced plan still leaves out tax breaks and supplementary spending that many believe are needed to nudge along industrial growth. The plan also is short on help for the jobless, whose ranks are expected to surge as the government tackles bad debts and companies go bankrupt.

Japan’s unemployment rate is at 5.4 percent, just short of the record 5.5 percent in December, the highest since the government began keeping track in the 1950s.

There are growing worries that such ``hard-landing″ approaches to eliminate bad debts, issued without additional measures to offset the damage, might send the entire Japanese economy crashing.

``It’s similar to how a car can’t get started with just one wheel,″ said Koji Shimamoto, chief economist with BNP Paribas in Tokyo. ``The plan is no good. We can’t expect major change, although it’s better than nothing.″

The problem is centered on Japan’s political leadership, long stuck in the old scenario for growth _ using public spending to boost the economy _ that proved so successful after World War II, until the ``bubble″ economy burst in the late 1980s. Those policies have helped build up the highest public debt in the industrialized world, at $5 trillion, 135 percent of Japan’s gross domestic product.

Politicians still want public works projects to build roads and bridges. Complacent bureaucrats do not want to change the rules. Bankers do not want to admit their lending mistakes. And public awareness remains low about Japan’s need for a modern market economy.

Haruo Shimada, economics professor at Keio University in Tokyo, said Takenaka’s proposal is Japan’s best hope in years to fix the economy and move toward stable growth.

``To clean up a 10-year sludge is tough,″ Shimada said, adding that the battle is only halfway over. ``All I can say is I hope he wins.″

Takenaka had to backpedal on initial ideas for tightening bank accounting rules in a way that could have pushed the bad loans up on their books. Some feared those rules would bankrupt banks and companies.

When questioned recently about the dangers of forging ahead with a painful bad-loan cleanup, Prime Minister Junichiro Koizumi hinted that other measures were in the works.

``I’ve said from the past I will avoid unnecessary confusion and a financial crisis. The economy is a living thing, and we must keep this in mind while we tackle non-performing loans,″ he said. ``I’m just doing what has to be done.″

Richard Katz, who has written books on the Japanese economy, believes Japan has enough strengths _ an educated work force, sophisticated technology and an orderly society _ to ensure its economic revival.

``That’s the good news,″ he said. ``The bad news is it’s going to take 10 years for us to get there.″

Peter Tasker, strategist for Dresdner Kleinwort Wasserstein Research in Tokyo, said deflation, or the continuing drop in prices, is the big economic danger because it erodes wages and stock prices, producing even bigger corporate debts and possibly leading to a ``zombification″ of the entire economy.

``The idea that ‘surgery’ can remove the ailing parts of corporate Japan while leaving the healthy parts intact is a Dr. Frankestein-like fantasy,″ he said in a report.

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