Economy Needs Stimulus More than Repayment of Bad Debts
By Tim Shorrock
WASHINGTON, Jun 12 — Richard Koo, the maverick chief economist for Japan’s Nomura Research Institute, is well-known for his theories that Japan’s financial crisis is caused more by corporate balance sheet problems than a lack of structural reforms at the macro level.
The Japanese government, Koo believes, should concentrate less on resolving its non-performing loans and more on stimulating the economy, as President Franklin Roosevelt did during the height of the Great Depression of the 1930s.
About once a year, Koo comes through Washington with the latest twists on his ideas, and leaves with many people asking why, if his solutions are so simple, the Japanese government and the global financial police at the International Monetary Fund never seem to take him seriously.
His latest appearance was a Jun. 4 speech at the Sasakawa Peace Foundation here. This time, his message was timed to promote his new book, 'Balance Sheet Recession: Japan's Struggle with Uncharted Economics and its Global Implications'.
The government of Prime Minister Junichiro Koizumi, Koo declared, should immediately adopt a large stimulus package of 40 billion yen (339.5 billion U.S. dollars) or more to give corporations the breathing room they need to repay debt, restore their balance sheets and begin investing again in plant and equipment. Koizumi should then keep it in place until most corporate debt is paid off and the economy is stabilised, he added.
"Japan needs a financial stimulus not to help construction companies but because it's in a national emergency," he said. "If everyone is paying down debt, of course the economy will contract like crazy. So if the public understands this, the stimulus will work."
That, of course, runs directly counter to the advice of most mainstream economists, the U.S. government and the International Monetary Fund, which stress the need for Japan to aggressively deal with non-performing loans (NPLs) held by its banks.
In early June, a top IMF official said resolving NPLs was of "primary" importance. "There's not the sense of urgency that perhaps we feel," Anne Krueger, the IMF's first deputy managing director, said during a two-day visit to Tokyo.
Kreuger also urged Japan to use monetary policy — such as the direct purchase of assets by its central bank — rather than a stimulus package to end deflation.
"There is not very much, if any, room for expanded government expenditure or so-called fiscal stimulus: they have been tried for several years and had little effect," Kreuger, the IMF's number two official, declared.
Koo is a controversial figure in Japan, said Eiichiro Tokumoto, a Tokyo financial writer and analyst who closely follows Japan's private equity market. "Some say he is a puppet of the banking sector," he said. "But I tend to agree with him. Yes, it's very important to resolve the NPLs. But Japan is suffering from deflation, and if we bring NPLs down too quickly, it makes the problems worse and worse."
Every speech Koo gives in Washington appears to coincide with another disaster, unfolding or pending, on Japan's financial horizon. This time, he arrived in the midst of a mounting scandal in Japan about the Japanese government's bailout of Resona Holdings, the country's fifth-largest bank, and rumours that the Bush administration is trying to weaken the dollar to give U.S. exports a boost at a time of increasing economic tensions.
Such a move, analysts say, would be a tremendous setback to Japan's attempts to recover because it would raise the price of Japanese exports at a time when foreign markets seem to offer its only hope.
For Japan and the rest of Asia, a lowering of the dollar and a strengthening of the yen would be "nothing short of a nightmare," William Pesak, the highly-respected Tokyo columnist for Bloomberg News, wrote a few weeks ago.
"A weaker yen has been the only thing standing between Japan and recession this past year; take it out of the equation and the economy is in trouble.''
Koo disagrees that the weakness in Japan's banking system is central to the country's ailing economy. "Japan's banks are a problem but not the key constraint," he said. The primary issue for policymakers to understand is that 70 to 80 percent of Japanese companies are paying down their debt, which is at a record low of zero percent interest, because asset prices keep falling and their liabilities remain on their books. "So they have a horrendous problem."
Koo calls this situation a "Japan-type bankruptcy", where companies are making good products but use cash flow to repay debt and "quietly keep their heads low" by holding off on investments.
His analysis is partially borne out from recent statistics. According to the 'Nihon Keizai' newspaper, Japanese companies will cut their capital spending this year by 2.2 percent from the year before, marking a third consecutive year of decline.
A few months ago, the research firm International Digital Corp said investment in information technology had fallen for the second year in a row. It said banks were holding back on their information technology investments because they lacked funds after paying off bad loans.
The slowdown in spending hurts Japanese companies that could use new investment to improve their competitiveness, said Koo. The amount being spent in a year to pay down corporate debt is equal to four percent of Japan's GDP, he added.
Koo believes a stimulus package would be particularly timely now because corporate debt levels, and the ratio of assets to liabilities, is returning to where it was before Japan's bubble burst in the early 1990s. "Japanese corporate balance sheets are now in far better shape" than during the bubble, he said. "So we're making progress, but we're not out of the woods."
Arthur Alexander, a visiting professor at Georgetown University and former director of the Japan Economic Institute in Washington, argued that "Japanese companies are actually doing investing" but have seen their rate of return fall because of the decline in value of assets, especially land.
Japan's rate of return is lower than the United States and way below South Korea and Hong Kong, he noted. "My interpretation is this is a rate of return problem," Alexander said. (Inter Press Service)
