The action planned by the Japanese FSA to reduce banking overcapacity will have a dampening effect i...
The action planned by the Japanese FSA to reduce banking overcapacity will have a dampening effect in the economy through a reduction in lending to Japanese corporates.
Economist Andrew Smithers at Smithers & Co said this is all the more unfortunate as the Japanese economy has recently shown signs of deterioration.
The impact on the stock market is also likely to be negative as companies whose debts are near the 10 times cashflow limit will be encouraged to realise assets. These are likely to include cross-holdings, which will be bad for the stock market as it alters the supply/demand imbalance of the market.
Smithers said: 'Many commentators continue to press for banking reforms that would, if implemented, turn stagnation into depression. They appear to be supported by the governor of the Bank of Japan.
'The new head of the FSA, Heizo Takenaka, has made proposals that, if implemented, would have resulted in widespread bankruptcy and a sharp fall in output and employment.'
Smithers believes this policy to be mislead. He continued: 'This folly has been defended on the grounds it is the only way to get the Bank of Japan to ease monetary policy. This argument is, however, badly flawed. Getting the Bank of Japan to agree to an effective easing of policy is neither likely nor necessary.
'Fiscal easing has wrongly been touted as a solution. In the absence of monetary accommodation, standard economic theory shows fiscal easing would push up the exchange rate and add to Japan's deflationary pressures. Happily, effective fiscal easing seems improbable.'
Smithers added that the government seems set to adopt an interest paying debt/cashflow ratio of 10 or less as a key criterion as to whether or not debt-strapped companies have viable recovery prospects.
'This approach will encourage companies to sell cross-holdings and other financial assets, which is bad news for the stock market,' he said.
Smithers added that the true level of bad loans is many times the official estimate, which will only exacerbate the effect of the banking proposals.
'The sad farce, which masquerades as a debate on economic policy, continues,' he said. 'Bad as it is, the Japanese government's mismanagement of its economy has not been as awful as the majority of its critics have wanted it to be.
'The banks have not caused the economy's problems, it is the other way around. Deflation has pushed the banks into bankruptcy. Happily, since the government guarantees their depositors, they can survive with negative equity.
'It is also nonsense to think forcing weak companies into bankruptcy will improve the profitability of the survivors. The opposite will occur because demand will fall even faster than capacity.'
Clarke replacing Balkham
'Deep-dive analysis of client behaviour'
Ways to mitigate April’s increases
The best equity income funds examined