With two quarters down, Japan is poised for its fourth recession in ten years. However, the expected...
With two quarters down, Japan is poised for its fourth recession in ten years. However, the expected recession is not the only thing the economy should be concerned about: the banking sector is at the brink of collapse and most fund managers have lost faith in the Koizumi government.
Koizumi was expected to be the stable prime minister Japan was longing for. However his 'no aid' policy to the banking sector is a disaster waiting to happen.
'The optimism in Japan was dampened by Koizumi slowing his macro-level, top-down restructuring and by the lack of progress on bad debts,' says Philip Whittome, head of the Japan desk at Investec. 'Given that his cabinet is divided, he has been under pressure from the conservatives and has not taken action on Japanese banks.
'The government is cornered. Right now, there is very little Koizumi could do given that fiscal and monetary policy have already been used up as tools. The ¥30 trillion government bond money has already been allocated for spending and in the new budget he is expected to spend on new economy products such as fibre optics.'
If the banking sector keeps on struggling, and there are no indications to show that it will stop, the banks might be looking at nationalisation as a possible fate.
'One way of coping with the bad debts has been to introduce more banking regulation,' says Whittome. 'However, this would place banks under pressure to keep higher reserves and write off shareholder equity and so nationalisation would be a clear solution.'
However, the nationalisation of banks is not likely to happen until March next year.
Stephen Hall, investment manager at Britannic Asset Management, agrees that the state of the Japanese banks is a cause for concern.
'The situation with the banks' bad loans is worsening. Only this year, Japanese banks have written off ¥6.3tr in bad debts, a figure they did not expect,' says Hall.
He continues: 'At this rate, the government should act fast ' in the next six months I would say. The Japanese government should set up bodies to write up the bad debts, otherwise Japanese banks might be facing nationalisation. Some banks have perfectly good profit records but are facing liquidity problems.'
There is very little hope of rescue for the Japanese economy. Economists are forecasting that the economy will have shrunk 0.7% in 2001.
Japan has a government debt of 130% of GDP and interest rates are already held at zero. The jobless rate in October was at a 55-year high at 5.4%.
But there are opportunities for the investors, now more than ever. The value of stocks has gone down by more than they did in 1998.
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