Japan Unveils Plan to Fight Deflation, Reduce Debt

In a bid to deliver on pledges made during President Bush’s trip to Japan last week, the Japanese government Wednesday released an economic package designed to ease deflationary pressure and reduce bad bank debt.

Analysts predict it won’t do much of either. “I’d score this package a 40 out of 100,” said Morio Imai, an independent economist. “I see little impact coming out of it. They’re just recycling the same old ideas again.”

The plan includes measures to beef up bank inspections and disclose the findings; buy bad loans from banks at market value; increase liquidity in the monetary system; and buy bank shares.

Analysts say despite its stated goal of fighting deflation, the plan includes no significant measures to reinflate the economy. Nor does it do more than tinker with Japan’s enormous bad-debt problem, estimated at more than $600 billion by some private economists.

The plan’s primary objective is to prop up the stock market over the short term and allow Japan’s battered companies and banks to squeak through the end of the fiscal year less than five weeks away.

“Japan can get through March 31,” predicted Susumu Okano, head of economic research at Daiwa Research Institute, an affiliate of Daiwa Bank. “I think they’ll avoid any sort of financial meltdown.”

In the land of incremental decision-making, Japan’s policymakers recently have signaled a greater willingness to inject public funds into the banking system if there’s a crisis--a break with earlier suggestions that such use of taxpayer money is political dynamite.

That said, there still are big obstacles preventing Japan from grappling seriously with its problems. Before Prime Minister Junichiro Koizumi can allocate the funds, he must make a formal declaration that Japan has a financial crisis. However, many politicians and bureaucrats, who have spent the last decade reassuring all that the situation is under control, will strongly resist such a move.

Any stated crisis also threatens to further weaken Koizumi’s political position at a time when he’s seen his popularity sharply decline. It also could saddle him with the legacy of having a crisis declared on his watch.

Even assuming all those hurdles can be circumvented and a crisis is declared, banks are required to formally request the money--a step they may balk at until they’re absolutely desperate.

“Politicians don’t want to declare a financial crisis, and bankers don’t want to ask for the money because they’ll lose their jobs,” said Ron Bevacqua, economist with Commerz Securities Japan. “The problem won’t be fixed until there is a real crisis.”

Japan continues to spend money on troubled companies, despite prospects that the funds will never be recovered. On Wednesday, Daiei Inc.’s main banks announced a $4-billion bailout for the supermarket chain. Japan’s economic landscape is littered with other companies in equally bad shape.

“The trouble is, there’s not just one Daiei but thousands of companies like that out there,” Bevacqua said. “No politician in any country is willing to close 20% of the nation’s companies and weather 10% unemployment.”

As the bad news pours in, Japanese are increasingly adopting a defensive outlook and realizing they’ll have to fend for themselves, in a nation that once looked to the government for protection and near-absolute security.

Kazumi Ono, a 27-year-old secretary at a Tokyo law firm, said she worries about job security, the rising cost of medical care and the nation’s pension system.

“I doubt Koizumi will be able to reform Japan,” she said. “I’m really quite worried about the future.”

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Hisako Ueno in The Times’ Tokyo Bureau contributed to this report.