KYOTO, Japan, Aug 24 - Japanese Economics and Financial Services Minister Heizo Takenaka said on Sunday the country's banks were on track to resolve their bad loan woes, a problem which has stifled growth in the world's second biggest economy for the past decade. Speaking at a public meeting in Kyoto, western Japan, Takenaka said banks had come a long way in correcting a period of excessive lending which had brought about a sea of bad loans. "The ratio of bank lending to gross domestic product (GDP) is now at around 80 percent and we are seeing the final stages of a correction," he said, adding that the ratio had been at around 120 percent during the asset-inflated "bubble" years of the 1990s.
"The bad debt problem will be resolved in two years," he said. Japanese banks are struggling with 40 trillion yen ($338.8 billion) in bad loans and are under pressure to dispose of them, though they are also under public fire for having cut fresh loans to companies in the process. Banks are under orders, since last September, to halve their ratio of bad loans to total lending by March 2005. But Takenaka, defending his policies ahead of a crucial election for Prime Minister Junichiro Koizumi next month, fended off criticism that banking reforms were hurting the economy. On Saturday, he had told a gathering of students and business people that reforms were proving less damaging to the economy than first expected.
"There were worries that bad loan disposals would lead to a surge in unemployment, but with 10 trillion yen in write-offs, unemployment has risen by 70,000," he said in the central city of Nagoya. "The Cabinet Office had at first estimated a loss of about 140,000 jobs," he said. Takenaka also reiterated at the gathering that the economy was seeing fresh signs of recovery, as confirmed by data earlier this month showing GDP grew for the sixth straight quarter in April-June. The reading had been a positive surprise and made good reading for Prime Minister Junichiro Koizumi, whose economic management is in the spotlight ahead of a September election to keep his job as leader of the Liberal Democratic Party -- and with it the post of prime minister. But in a sign of policy challenges ahead, Finance Minister Masajuro Shiokawa said on Saturday that Japan would need to raise its five-percent sales tax from fiscal year 2006/07.
"We won't be able to avoid raising the sales tax as we head for a situation where one elderly person will need to be supported by two people," Shiokawa told a public meeting in Kobe, western Japan. Most economists and policymakers agree the sales tax must be raised to curb public debt, the highest among industrialised nations at around 140 percent relative to gross domestic product. But the issue -- an urgent one as Japan seeks fiscal solutions to a rapidly ageing population -- has been mostly treated as taboo on fears it could hurt consumption and tip the economy into recession. ($1=118.06 Yen)//