Proposed Remedies Spur Japan Stocks


Stocks and the yen strengthened at week’s end after Japanese officials signaled they were considering fresh pump-priming measures, accounting reforms and perhaps even more tax cuts to stimulate the moribund domestic economy.

Buoyed by hopes that the ruling Liberal Democratic Party is gradually abandoning the tight fiscal policies that many analysts see as dooming Japan to recession, the Nikkei stock index broke through the important 16,000 barrier Friday to close at 16.046.45, up 924.47 points. The yen rose 1.98 yen to 128.90 to the dollar.

The markets were reacting in part to an LDP proposal for a new land valuation system that will help troubled Japanese banks achieve the tough new capital adequacy requirements that go into effect on April 1. The LDP is also reportedly planning to spend up to 80% of its public-works budget in the first half of 1998 to jump-start the economy.


“The government is willing to accept any proposals that would effectively address the nation’s economic slump, given the seriousness of the current situation,” Finance Minister Hiroshi Mitsuzuka said Friday.

Meanwhile, the Bank of Japan announced it was sticking to its “free-money” policy by keeping interest rates at a record-low 0.5% per year.

Earlier in the week, Prime Minister Ryutaro Hashimoto, who has been the nation’s leading advocate for fiscal discipline, did not rule out the possibility of far-reaching tax cuts. Queried by reporters, he said only that he hoped such measures would not be necessary. On Friday, he promised “to do all I can to stabilize the financial system and achieve economic recovery.”

Koji Omi, head of the Economic Planning Agency, said he believes that his agency’s latest monthly report--which said the economy is at a standstill--is too optimistic. He hinted that the LDP is studying further stimulus plans but said nothing had been formally decided.

Still, some analysts remained skeptical that these morsels of tasty economic news would serve up financial reforms hearty enough to satisfy bearish investors.

“The core issue of the unstable financial system, the bad-loan problem, has not been solved at all,” said Akihiro Arai, an analyst at Kankaku Research Institute. “These stimulus measures have been created because the public forced [the government] to do something. . . . After they use up all the ideas they can think of, the market may be disappointed again.”


The proposed new land valuation system may be only a cosmetic fix for the nation’s ailing banks, but it was warmly welcomed by the financial community, the Nikkei financial daily reported.

The new scheme would allow banks and companies to post their property assets at current market values without requiring them to pay taxes on any unrealized gains. In the past, many Japanese balance sheets valued real-estate holdings at their purchase price--even if the land had been bought 20 or 30 years earlier--to avoid paying taxes based on the current price.

Even though land prices have tumbled in the 1990s since the demise of the “bubble economy,” long-term appreciation has been steep. The accounting change would boost the balance sheets of many shaky financial institutions that close their books on March 31, the end of the Japanese fiscal year.

Hashimoto and Finance Minister Hiroshi Mitsuzuka expressed support for the plan and said the LDP and its two parliamentary allies were studying the idea.

“If this bill is passed by Parliament sometime in the future, it will increase the banks’ capital adequacy ratios and may ease the current problems from the credit crunch,” said Eiji Yamamoto, professor of economics at Konan University in Kobe.

A Nikkei public opinion poll earlier this week found that 65% of those surveyed wanted larger tax cuts or more economic stimulus measures than what the LDP has so far endorsed.


The LDP’s current proposal, which is to be submitted to Parliament for approval this month, calls for a $231-billion financial stabilization package. Of that, $131 billion would be used to protect depositors at bankrupt financial institutions. The other $100 billion would shore up healthy financial institutions and pay for weak institutions to be absorbed by specially created holding companies, according to an unofficial proposal drafted by the Finance Ministry.

Etsuko Kawase of The Times’ Tokyo bureau contributed to this report.

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