The Heritage Foundation

News Releases on Asia

March 26, 2002

March 26, 2002 | News Releases on Asia

Japan Needs Serious Medicine to Cure Its Financial Crisis, Analysts Say

WASHINGTON, Mar. 26, 2002-Only by resorting to a series of free-market reforms can Japan revive its declining economy and weak financial sector, says a new paper from The Heritage Foundation.

The paper comes on the heels of a government announcement that land prices in Japan have fallen for the 11th consecutive year-and that the rate of decline has increased.

Japanese banks must report their assets and performance by March 31, the end of the financial year. If they fail to meet investors' expectations, a resulting loss of confidence in the banks could seriously harm the country's financial system, warn Balbina Hwang, Heritage's Northeast Asia expert, and Brett Schaefer, Heritage's Kingham fellow for international regulatory affairs.

To avoid this, Prime Minister Junichiro Koizumi and other Japanese leaders must act quickly, the analysts write. Among their recommendations:

End ineffective infrastructure programs.
In the 1990s, Japan spent $1 trillion on 10 different stimulus packages, yet real-estate values have receded to 1982 levels, private-sector investment in the last quarter of 2001 was down 12 percent from the previous year, and public debt has ballooned to 140 percent of gross-domestic product (GDP)-more than $6 trillion.

Get rid of bad debt.
Japan's banks are saddled with nearly $1.8 trillion in "non-performing" loans. That's why the government in 1998 established the Resolution Collection Corporation-to foreclose on the loans and resell the properties. But so far, just $139 billion in bad loans have been processed in this way-an indication that the RCC needs to become far more aggressive, Hwang and Schaefer say.

Stop government bailouts.
For decades, private companies in Japan have relied on government bailouts during hard times and on cartels to control prices. To keep afloat, the banking sector received $56 billion in government subsidies in 1999. Other companies traditionally resist layoffs or even redeploying workers for efficiency's sake.

The government should change laws to encourage worker redeployment and corporate restructuring where necessary, say Hwang and Schaefer. Also, it must allow some big companies to either downsize and become more efficient or fail. And it must break up the cartels in banking and other sectors of the economy.

Finally, the analysts say, if Japan's consumers are to play a part in the recovery, the government must lower taxes to encourage spending.

"Recovering from the economic problems caused by 10 years of willful inaction is no simple task and won't be accomplished quickly," Hwang and Schaefer write. "Yet failing to undertake these tough reforms could consign Japan's economy to a steeper decline and perhaps bring on an economic crisis of regional or even worldwide proportions."

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