Japan on tenterhooks for bank plan

Last-minute adjustments for Takenaka's bank plan?

Two new initiatives to revive Japan's battered economy are due to be launched by the government.

The cost to the government could be up to 30% of gross domestic product

David Beer
Standard & Poor's

It has chosen Wednesday 30 October to unveil a plan to fight the steadily falling prices which are hammering Japanese companies in their home country.

The government will also detail a second plan to deal with the massive bad debts hobbling the banking system.

The Prime Minister Junichiro Koizumi has given his backing to the basic structure of the bank rescue plan.

After a successful weekend of by-election victories, Mr Koizumi reassured the man he put in charge of the bank plan, economy minister Heizo Takenaka, of his support.

Mr Takenaka, for his part, said his package would be robust.

"Basically, I want to put out a solid plan and I think we can do it," he said.

Stormy meetings

The idea is to inject public money into a banking system weighed down by bad debts officially pegged at more than 50 trillion yen.

But rather than a "big bang" approach which could trigger multiple bankruptcies, or even cripple the banks themselves, a more staged approach is likely.

Is Koizumi boxed in by factional infighting?

One radical step, cutting a special tax break which has been used by banks to pad out their assets, has already been delayed a year, according to Japanese newspapers.

But despite reports of three stormy meetings between Mr Takenaka and banking chiefs in the past week alone, government spokesmen played down the stories.

There is also pressure from the construction and real estate lobbies in the ruling party which warn that moving too fast could send the struggling economy into a tailspin by halting lending altogether.

Going down

Even so, stagnant industrial output and stubbornly high unemployment figures released on Tuesday underlined the need for a serious attempt at rapid action.

Standard & Poor's, the international rating agency, said it feared that reform would once again be slowed down.

Every delay, the agency warned, pushed the cost of dealing with the problems even higher.

"We have been talking for some time about a package that acknowledges that the hole in the balance sheets of the banks is so enormous that government money will be required to be injected," said David Beer, the agency's managing director of sovereign and international public finance ratings.

"The cost to the government could be up to 30% of gross domestic product."

Without prompt action the government's debt rating - already at the same level as Latvia or Poland, according to debt rating agency Moody's - could drop even further, driving up the cost of servicing the country's huge public borrowings.