Japan unveils revival plans

Mr Takenaka's plan has been pushed through

Japan is to introduce 1 trillion yen (£5.2bn; $8.2bn) in tax cuts and heighten efforts to write off bad loans at banks in a campaign to revive its flagging economy and halt a slide in prices.

The government has revealed details of a long-awaited policy package after securing support from Japan's three ruling parties.

I think there's a good balance between an acceleration of bad loan proposals and economic revitalisation

Yukiko Ohara
CSFB

The package includes measures which will prevent the banks from taking on too much risk when they lend money.

There are also measures to review the tax and accounting methods used when writing off of bad loans.

"We will swiftly implement our financial renewal programme with the aim of resolving the bad loan problems in the year to March 2005," said Prime Minister Junichiro Koizumi.

Economics Minister Heizo Takenaka, who has spearheaded recent reforms efforts, said the package was a "good start, considering that this problem has affected Japan for 10 years, and we only spent a month discussing it".

And the plans, while excluding some more controversial ideas, received a cautious welcome from analysts who had feared the government would have been forced to accept more compromises.

"I can give credit to the policy," said Hiroshi Hosoda, bank analyst at Rating and Investment Information.

"It wasn't a worst-case compromise".

Falling prices

The measures to accelerate the write-off of banks' bad debts are aimed at tackling a crisis which has burdened and shackled lenders, limiting the supply of fresh cash available to firms seeking new investment.

The debt mountain is estimated at 50 trillion yen.

The government's reform plan "shows that we are moving towards speedier bad-loan disposals", said Barclays Capital chief economist, Mamoru Yamazaki.

Japan's economic malaise has been worsened by a continuing decline in Japanese prices.

This so-called "deflationary spiral" has discouraged spending by businesses and consumers, who benefit from lower prices by delaying spending decisions.

It also adds to the debt crisis by, in effect, increasing the size of previous debts.

Job loss fears

The government hopes the tax cuts will free sufficient cash to spark a spending boom.

It would be misleading to just focus on measures to speed up bad loans disposals

Kenji Yumoto
Japan Research Institute

But measures to tackle bad debts head-on risk forcing bankruptcies among firms without the cash to meet loan requirements.

The prospect of mass job losses had raised concerns among all Japan's major parties.

"We will do our utmost to secure employment and accelerate the early renewal of corporations," Mr Koizumi said.

Balancing act

Earlier concerns that the government's plan would be a severely watered down version of Mr Takenaka's initial plan appeared to have been groundless.

"It's not watered down from the initial proposals," said Nomura Securities Financial Research Centre banking analyst Akira Mizobuchi.

"I think there's a good balance between an acceleration of bad loan proposals and economic revitalisation."

"Overall, this locks tight controls onto the banks and is oriented toward a hard landing, so it's rather tough on the banks' shareholders," said Credit Suisse First Boston director Yukiko Ohara.

"But it would be misleading to just focus on measures to speed up bad loans disposals," said Japan Research Institute chief senior economist, Kenji Yumoto.

"Bad loan disposal and corporate rehabilitation are two sides of the same coin.

"If too much emphasis is put on disposal, it would deepen deflation and give birth to new bad loans."