Financial Sector

November 2003

The Bank of Japan (BOJ) is aiming for its monetary easing to permeate through the economy to tackle deflation and achieve sustainable growth, according BOJ governor Fukui. BOJ is providing ample liquidity, which is having the effect of stabilizing the financial system and supporting an economic recovery. The central bank's commitment to maintaining its quantitative easing framework was playing a role in keeping long-term interest rates low. The BOJ is committed to keeping that framework, whereby it supplies ample liquidity that effectively keeps short-term interest rates at zero, until year-on-year changes in the consumer price index stabilize above zero. (November 18, Reuters, the Daily Yomiuri)

The Financial Services Agency is putting increasing pressure on the nation's commercial banks to scrutinize the rehabilitation plans submitted by financially troubled companies. According to FSA, banks should screen overly optimistic earnings forecasts and half-baked streamlining measures out of the rehabilitation plans drafted by ailing firms in cooperation with them. During its inspection for the half-year closings at the end of September, FSA pressed major banks to reclassify some of their loan claims into lower ratings and to tighten their collateral assessment. The move reflects the stance of Economy and Financial Services Minister Takenaka, but has also prompted some banks to complain about excessive intervention in management decisions. If a bank underestimates the possibility of a loan recovery, it will have to set aside more money in loan loss reserves, possibly causing it to post a larger loss.　(November 5, the Nihon Keizai Shimbun)

The Development Bank of Japan's (DBJ) presence in the corporate rehabilitation field is growing. To avoid criticism that its operations create unfair competition with private-sector institutions, DBJ has underlined its efforts to work alongside private banks to support the rehabilitation of ailing firms. DBJ currently works with private-sector banks to provide loans that enable a company undergoing rehabilitation to pay back debts in a lump sum. In addition, it also offers debtor-in-possession financing to companies that are undergoing court-ordered rehabilitation. Most of these loans arranged by the bank came about at the request of the major private-sector banks seeking to support the rehabilitation of their own borrowers. As a result, DBJ has become a last resort for corporate rehabilitation efforts despite its desire to encourage the private sector to play a larger role. Both private-sector banks and investment funds appear to be looking to DBJ to continue playing a vital role in corporate rehabilitation efforts. In the event of a Japanese economic recovery that prompts a brisk inflow of private-sector money, DBJ may compete directly with private-sector institutions. With some critics also warning that the bank's function is overlapping with that of the government-backed Industrial Revitalization Corp. of Japan, the former organization's role will need to be re-assessed. (November 5, the Nihon Keizai Shimbun)

Deflation will slow in 2004, and economy will continue slow recovery, according to the Bank of Japan (BOJ). All but one member of the BOJ policy board forecast that prices would continue their four-year slide over the next year and a half. Eight of the nine projections issued by members for the consumer price index, excluding fresh food, ranged between minus 0.3% and minus 0.1% on a year-on-year basis for fiscal 2003, while the range for fiscal 2004 was between minus 0.5% and minus 0.2%. One member predicted that price levels would remain the same in fiscal 2003 and that inflation would begin in fiscal 2004, logging a 0.5% rise on a year-on-year basis. The report is released twice a year, outlining Policy Board members' medium term outlook for the economy. Due to largely to growth in the U.S. and East Asian economies, Japan's economy will gain momentum toward recovery in the bottom half of the business year and continue to do so through fiscal 2004. But this recovery lies primarily among large manufacturers, the report notes. Other companies remain mired down by excess debt and workers, while private consumption is likely to remain stalled. All members projected positive growth in real gross domestic product for fiscal 2003 and fiscal 2004, with each forecast ranging between 2.3% and 2.7% growth for fiscal 2003 and 2% and 2.8% growth for fiscal 2004. However, GDP numbers tend to be inflated. Due to the calculation methods used, real GDP tends to be pushed up by price falls that are the result of technological innovation. The report lists four major reasons that Policy board members' forecasts might err: developments in overseas markets, movements on financial markets, the progress of banks in disposing of their problem loans, and future developments in domestic private demand. (November 1, the Japan Times)