Japan acts to relieve debt crunch

The changes could lead to up to 200,000 job losses

Japanese banking shares have soared higher after the government unveiled new measures to tackle the huge pile-up of bad loans.

A draft report by Prime Minister Junichiro Koizumi's economic policy panel said that banks could sell bad loans if they are not disposed of in two to three years time.

Potentially I think this is a major breakthrough

Garry Evans
HSBC

Resolving Japan's bad loan problem is seen as a key to getting the economy back on its feet.

Core bad loans at Japan's main commercial banks stood at about 11.6 trillion yen ($93.7bn) at the end of March, weighing heavily on the economy.

But the economic reforms could also lead to up to 200,000 job losses, according to a report in the Japanese press which quoted Economy Minister Heizo Takenaka.

Investor enthusiasm

Since taking office in April, Mr Koizumi has been struggling to implement economic reforms and prevent another fully-fledged recession.

And stock markets have been rising and falling in line with the depth and reach of the reforms.

It's nice to have a rallying cry but positive changes will not necessarily mean immediate economic growth

Michael Brown
ABN Amro

Under the changes, debts accrued by the banks after firms go bankrupt could be sold on to the state-backed Resolution and Collection Corp.

Mizuho, the world's largest banking group by assets, saw its share price rise by over 10% on the news, while UFJ Holdings jumped 14.8% and Sumitomo Mitsui Banking almost 11%.

The enthusiasm was aided by Societe Generale Securities which raised its rating on Japan's banking sector to neutral from underweight on Wednesday.

The newly-found strength of the banking sector helped the Nikkei index of leading shares rise 288 points to 12,962.

Potential breakthrough

"Potentially I think this is a major breakthrough," said Garry Evans, chief strategist at HSBC, but also warned that "the devil will be in the details".

Other analysts also expressed caution.

"It is going in the right directions, but we have so often heard about these kinds of final solutions," said Hokan Hedstrom at Commerz International Capital Management.

And the reforms will have little immediate effect.

"It's nice to have a rallying cry but positive changes will not necessarily mean immediate economic growth," said Michael Brown, head of equities and capital markets at ABN Amro Securities in Tokyo.

Plea for patience

The report itself will also warn the general public that structural reforms will take more than two years to begin to bear fruit.

Economic advisers are expected to warn of slow growth in the near-term, with growth for the current fiscal year set to significantly underperform the Government's official forecast of 1.7% growth.

Persuading Japanese voters to accept the slow pace of economic reform is crucial ahead of next month's Upper House elections.