US urges Japan to shed bad loans

White House economics official Larry Lindsay urges Japan's Takenaka to push for reform

The US has asked Japan's economy minister Heizo Takenaka to urge the country's troubled banks to dispose of their bad debts.

Also, during Mr Takenaka's recent visit to Washington, the US economic official urged him to push ahead with aggressive measures to revitalise Japan's banking sector.

The markets like Japan's new prime minister

This is vital to ensure the country's cash-starved businesses re-gain access to the cash they need to invest, the US officials stressed.

"Hopes among US officials were much stronger than my expectations," Mr Takenaka said upon his return, seemingly surprised at the level of interest the issue raises in the US.

Global worries

World leaders have been concerned about the poor health of Japan's massive banks for a long time.

Their non-performing loans are estimated at 32 trillion yen ($264 billion).

And fears that a collapse of Japan's massive banks could lead to the meltdown of the global financial system have already spurred several international financial bodies into action.

Global rescue

A massive operation was recently set in motion by the Group of Seven nations, the International Monetary Fund, the Bank for International Settlements and several other financial bodies which have agreed to coordinate their economic policies, Japanese officials stressed.

The operation was initially agreed in February.

But only now, with a new prime minister in place, does the investment community dear to hope that economic reform will be implemented in Japan.

If the reforms do begin, the world has assured Japan that it stands ready to assist, with central banks, financial authorities and international institutions having agreed to work together to prevent a domino effect from sweeping through the world's financial system in case the Japanese banks collapse.

Government lending

Japan's banks have reduced their lending to companies dramatically during the last 12 months.

Instead they have focused on lending to the government which is unlikely to default on repayment.

During the last year, the banks poured 60% more money into government bonds than they did during the previous year.

This raised the sum lent to the government to about 70 trillion yen, according to Japanese press reports.

Reluctant borrowers

But the problems suffered by the Japanese companies are not simply due to a lack of access to cash.

Many of them are already heavily burdened by debts left over from the 1980s, when Japan's speculative bubble economy burst.

This makes some of them reluctant to borrow more.

Inaugural speech

Japan's economy is in dire need of repair.

And hopes are high that the man to fix it is Prime Minister Junichiro Koizumi.

However, although he says he is committed to economic reforms being implemented, he has not yet made any specific promises.

The Japanese people and businesses, as well as financial market traders are eagerly awaiting Mr Koizumi's inaugural speech on Monday in the hope that such details will be spelled out then.

Observers expect him to advocate the disposal of the banks' bad loans within three years, and a limit for the government's own bond issues of 30 trillion yen.

They also expect him to announce the preparation of the country's postal service - including mail, savings and insurance - for privatisation within three years.

This privatisation program is seen as pivotal to Mr Koizumi's reforms.

"Koizumi is very popular with investors right now," said Sumisei Global Investment Trust Management's chief fund manager, Nobuaki Kurisu.

"Sentiment should get a lift when he lays out a plan for reform and revival of Japan's economy and markets."