Japan likely to disappoint with package


Japan is prepping for the World Cup later this year, but experts see little else in the way of an economic boost for the country

Alex Frew McMillan
CNN Hong Kong

TOKYO, Japan -- Japan's share market closed lower Tuesday, as the country awaited an economic policy initiative that observers expect will likely be a disappointment.

On Wednesday, Prime Minister Junichiro Koizumi's cabinet is slated to unveil its long-awaited package to fight deflation.

In a big week on the economic front for Japan, that will be followed by a regular meeting on Thursday of the central Bank of Japan's policy board.

Koizumi stormed to power unexpectedly last April, championing reform. But critics say there has been a lack of action by the Koizumi administration to back up the strong rhetoric.

With Japan stuck in a decade-long economic quagmire, experts are expecting to be disappointed by Wednesday's package.

"The package is unlikely to contain more than the items already leaked that will do little to end the underlying problems," George Worthington, chief Asia Pacific economist with IFR Thomson Financial, noted in his weekly outlook report.

Yanagisawa: no new measures

Financial Services Minister Hakuo Yanagisawa confirmed as much on Tuesday. When asked about the contents of the antideflation package, Japan's top bank watchdog told reporters it would not include new measures.

The package will be a confirmation of steps that have already been announced, Yanagisawa said, including tightening inspections of the books of Japan's banks.


BOJ Governor Hayami is pressing banks to act urgently to arrest what amounts to a crisis of confidence in them

The banks, already in poor shape, have recently faced an almost unprecedented slew of negative news. They are big investors, and Japanese stocks keep sliding to 18 year lows.

Agencies such as Moody's and Standard & Poor's have been downgrading their credit ratings. Bad loans keep rising faster than the banks can write them off.

So there is plenty of pressure on Koizumi to act to prop the banks up. But experts note that there is no agreement from his administration on how to do that.

One of the simplest steps – an injection of government money – would be unpopular with the public and likely increase Japan's already huge national debt.

Takenaka: cash depends on special inspections

Economics Minister Heizo Takenaka said Tuesday that any capital injection should be based on special inspections of the banks. Like Yanagisawa's comments, Takenaka's statement implies that any state bailout is still some way off.

Japanese bank stocks ended lower Tuesday, as the likelihood of inaction on Wednesday sank in.

On Monday, the big banks had bucked a broad slide in Asian markets and a slip in the Nikkei to post solid gains on optimism about a possible bailout.

Mizuho Holdings, the world's biggest bank by assets, was one of the Tokyo exchange's largest losers Tuesday, falling 4.2 percent to 227,000 yen.

Sumitomo Mitsui, another of Japan's "Big Four" banks, was the second-most active stock, down 2.9 percent to 472 yen.

The other top banks, Mitsubishi Financial Group and UFJ Holdings, were also off, down 1.52 percent to 778,000 yen and UFJ falling 5.2 percent to 273,000 yen.

That helped drag the Nikkei 225 index down 0.91 percent, to 10,202.63, by the close.

BOJ tells banks to speed up

As far as the rest of the package goes, it is not expected to differ from the outline given to U.S. President George W. Bush on his recent visit to Tokyo.

John Richards, Japan strategist at Barclays Capital, does not expect the BOJ to ease its very lax monetary policy until there is progress in tackling the mountain of bad debts at the banks.

Many of Japan's most important policy initiatives are telegraphed well in advance and leaked to the local media. But Richards also said that this week, there is some chance of the unexpected.

"We doubt that the anti-deflation package will differ much from what was outlined to President Bush and do not expect a BOJ ease until progress is make on the banks," he wrote in a research note. "This is also the consensus, leaving the [bond] market vulnerable to a surprise."

BOJ Governor Masaru Hayami again reiterated that the central bank will not introduce an inflation target.

Hayami told a House budget committee that such a step is "impossible and inappropriate," according to Jiji wire service.

Japan's government often places heavy pressure on the nominally independent BOJ to do more to help the economy. But many observers feel that, with interest rates close to zero, there is little the BOJ can do.

Hayami also said that as of now, he does not believe any of Japan's banks are undercapitalized. But he pressed the banks to deal with their bad loans, and faster.

"The real problem facing the financial system is ... the slow progress in disposing of bad loans," he said in parliament.

"Harsh views toward banks among financial markets and depositors are also a result of slow progress in their bad-loan disposal," he added.