30 September 2002, 08:57  Shiokawa, Aiming to Articulate Japan's Policies, Confuses G-7

/www.bloomberg.com/
By Ann Saphir
Washington, Sept. 30 (Bloomberg) -- Japanese Finance Minister Masajuro Shiokawa isn't sure what he told U.S. Treasury Secretary Paul O'Neill about his plans to fix Japanese banks and overhaul the economy. O'Neill isn't sure what he heard.
That confusion highlighted the Japanese government's inability to articulate a clear policy for getting the country out of a decade-long economic malaise. It also reinforced concern about the world's second-largest economy at this weekend's meetings of finance officials from around the world.
Shiokawa told reporters Friday he didn't discuss banks' bad loans with O'Neill, only to contradict himself seven hours later. Then the finance ministry issued a ``clarification'' of his remarks. Yesterday, Shiokawa again told reporters he had discussed bank loans with O'Neill. Then he said he wasn't sure.
``What I got was the minister's view,'' O'Neill said during a press conference Saturday. ``I did not come away with an understanding of how these particular interventions are going to contribute to the change.''
Investors are noticing. The yen Friday fell against the dollar for the first day in four after Japanese officials gave conflicting signals about whether the government plans to bail out banks saddled with bad loans.
Koizumi's Confusion
``Shiokawa is reflecting the confusion of (Prime Minister Junichiro) Koizumi's administration,'' said Adam Posen, a Japan scholar at the Institute for International Economics.
Finance ministers in Washington for meetings of the Group of Seven, International Monetary Fund and World Bank were anxious to learn what the Japanese government plans to do to revive growth and help banks shed bad loans that are choking off new lending.
They mostly suggested disappointment in what they heard. ``Japan was indeed a topic'' at Friday's meeting of the G-7 finance ministers and central bankers, said Caio Koch-Weser, the German deputy finance minister. ``I suggest you ask the Japanese finance minister about that.''
Koizumi's government is under growing pressure to follow through on a pledge made a year and half ago to push banks to speed disposal of bad loans. The problem has just gotten worse: non-performing loans at Japan's 704 lenders rose 22 percent to 52.4 trillion yen ($426 billion) in the 12 months to March.
Reluctant on Write-Offs
With the Nikkei 225 Stock Average down 14 percent from the beginning of the fiscal year on April 1, Mizuho Holdings Inc., UFJ Holdings Inc. and other banks may have to subtract losses on investments from their capital when they close half-year books on Monday.
That may make them reluctant to write off the bad debts that are paralyzing Japan's banking system, starving the world's second- largest economy of the fresh credit it needs to expand. Bank lending hasn't increased since October 1996.
Just what the government will do about it isn't clear. The Bank of Japan on Sept. 18 signaled its concern over the state of the lenders by promising to buy some of the $200 billion of bank shares held by banks.
Bank of Governor Masaru Hayami said the intent was to ``help them reduce the impact of falling stocks.''
On Friday, Hayami backtracked, saying, ``our intention is not to prop up share prices.'' Instead, he portrayed the central bank's move as an effort to push the government to act. ``It's meant to secure financial system stability,'' he said after a meeting with G-7 finance ministers and central bankers.
Insufficient Capital
Shiokawa told reporters Japan should use public money to support banks that write off bad loans to companies that aren't viable. ``As a result, some banks may not have sufficient capital,'' he said. ``In such cases, capital should be injected into banks.''
His comments came after his deputy, Vice Finance Minister Toshiro Muto, said Shiokawa would not advocate a publicly funded bailout ``because there is no consensus on the issue within the cabinet.''
Financial Services Minister Hakuo Yanagisawa is one of those leading the opposition. He says banks don't need the cash. Lawmakers within Koizumi's own Liberal Democratic Party such as Taro Aso, the party's policy council chief, have also blocked a bailout, fearing a voter revolt.
Koizumi has gone silent, postponing announcement of plans to restructure the economy until October.
G-7 Wants Action
Officials from the G-7 countries made it clear they want action. ``In Japan, banking and corporate restructuring should be vigorously pursued, in particular addressing the issue of non- performing loans,'' U.K Chancellor of the Exchequer Gordon Brown said.
The announcement by the Bank of Japan that it would buy bank shares ``makes sense only if it is part of a more comprehensive program of solving the problem of non-performing loans,'' Koch- Weser said.
One of the rare displays of support for Japan came from IMF Managing Director Horst Koehler, who said he expects the stock purchase to be Japan's first measure of a ``comprehensive'' approach to solve the problems in its banks.
Koehler said after getting a briefing from Japanese officials that he supports the stock-purchase plan because he expects the government to announce more steps to clean up the banks in coming days or weeks.
That the rest of the world is confused about Japanese policy is no surprise, said Richard Jerram, chief economist at ING Securities in Japan.
``After more than a decade of inaction the Japanese political system appears to be immune to embarrassment,'' Jerram said.

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