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Web-only Exclusives
November 30, 2000

From Our Correspondent: Hirohito and the War
A conversation with biographer Herbert Bix

From Our Correspondent: A Rough Road Ahead
Bad news for the Philippines - and some others

From Our Correspondent: Making Enemies
Indonesia needs friends. So why is it picking fights?

Asiaweek Time Asia Now Asiaweek story

A MURKY DAY STARTS TO DAWN

Japan is moving, but remains in a sticky spot

By Jonathan Sprague


JAPAN IS ON THE brink - but of what? According to top officials, it is on the brink of recovery. "The only thing I'm optimistic about is the Japanese economy," Tokyo's top financial diplomat, Sakakibara Eisuke, said last week after citing worries about the global economy. "The financial crisis [in Japan] is over or ending. I think it will be over in one or two weeks." But according to many private economists and market players, Japan may be on the brink of a relapse. "The bold optimism of vice minister Sakakibara is not shared by many people because the economic outlook has deteriorated since the year-end," says Kirishima Kazutaka, chief analyst at Sumitomo Life Research Institute. "The triple demerits - higher interest rates, the stronger yen, and lower stock prices - are not doing any good for the effort to reduce bad bank loans."

The last few months have seen unprecedented movement in Japan's struggle to extricate itself from its decade-long economic quagmire. Japanese banks, after years of denying they were in trouble at all, have not only been falling over themselves to apply for public funds to help write off bad loans - asking for some $60 billion so far - many are plunging into mergers, tie-ups and restructurings. Since the start of the year, Sanwa Bank and Toyo Trust agreed to study a broad business alliance, Mitsui Trust and Chuo Trust said they would merge, Fuji Bank said it would take over Yasuda Trust, and Daiwa Bank formed links with the regional Osaka and Kinki Banks. Many institutions are withdrawing from overseas and other marginal businesses, and the biggest also reportedly plan to close 1,000 branches among them.

The banks are acting with uncharacteristic alacrity because the Financial Supervisory Agency and Financial Reconstruction Committee, created last year to oversee the industry, have proven tougher than expected. The former has already placed two of the nation's 19 major banks under government control, and the latter is holding the survivors' feet to the fire by threatening to withhold public funds unless they come up with far-reaching restructuring plans this month. "The FSA is far more demanding [than previous regulators] in demanding greater transparency and risk controls," says analyst Kunishige Nozomu of Lehman Brothers in Tokyo. "Banks can no longer hide the reality and the authorities [cannot] pretend that the problem is over when it is still there." Kunishige cautions that the crisis is far from over - while banks are expected to write off $87 billion in bad loans by the fiscal year-end in March, Lehman estimates they actually have twice that much - but he thinks that Japan may be getting over the worst.

So if the financial crisis at the heart of Japan's woes is coming under control, isn't Sakakibara's optimism justified? Maybe. Hope is growing that the economy, even if it isn't recovering, has at least stopped shrinking. "I have a feeling it bottomed out around the end of last September or early October and has stabilized since," Sakaiya Taichi, Director-General of the Economic Planning Agency, said last week. But the signs are still mixed. Industrial output showed an unexpected upward blip in December, probably due to heavy government spending, but it fell 6.9% for the full year, the heaviest drop in over two decades. The key is still-sluggish private demand. Retail sales fell 4.7% in December from a year earlier, and consumers remain wary while salaries stagnate and unemployment stands at the highest rate in nearly five decades. "Most important are the personal consumption figures for January and February following low winter bonus payments," Sakaiya said.

And a new crisis may be building. To pay for the government spending and tax cuts desperately needed to get the economy moving, Tokyo plans to issue bonds worth $2.7 billion in the fiscal year starting April 1. With the market already glutted with bonds that paid for previous stimulus measures, bond prices have tanked and yields have soared, with the benchmark 10-year bond hitting an 18-month high of 2.44% earlier this month. That in turn is pushing up interest rates, putting the squeeze on consumers and corporations as well as spooking investors. "The rising bond yield could hurt the positive effect of stimulative measures," says Lehman's Kunishige. "The government should take some action on high interest rates." Ruling party politicians are thus urging the Bank of Japan to buy bonds, pushing up the price and lowering the yield. The BOJ is resisting, arguing that a central bank buying its own government's bonds could invite out-of-control spending and hyper inflation. The market is divided - wanting neither high rates nor high inflation.

Bond yields have slipped back in recent days on hopes that the government and the BOJ will work out something. But for banks, corporations, investors and ordinary Japanese, uncertainty remains the only certainty. As U.S. rating agency Standard & Poor's said this week when it slashed the credit ratings of a devastating list of Japanese blue chips - names like Matsushita Electric, NEC and Japan Airlines - "The rating downgrades reflect the more difficult, less predictable environment for companies across the board in Japan."

- With reporting by Murakami Mutsuko/Tokyo


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