While all this was happening, the JMF approached the government to help devise plans for ejecting Japan out of the slush and on to the path to real growth, not propped up by deflation. What the members essentially proposed was to cut forward aggressively with banking and fiscal reforms on the one hand and corporate restructuring on the other. Overseeing all this would be constructive macroeconomic strategies to reverse the course of Japan’s economic downslide and fend off deflationary tendencies in the economy.
The strategy encompassed holistic sector restructuring across banking reforms, monetary policy, fiscal policy, and corporate restructuring. With regard to the financial sector, the staff stressed the need to adopt a more forward-looking approach to loan classification and provisioning practices across the system to ensure that loans are realistically valued on bank balance sheets. Key to the issue was the tracking of those accounts, which managed to keep out of the NPL zone but at risk of underperforming. Also crucial to banks was the issue of these particular classes of NPL’s.
If banks had to maintain capital adequacy ratios, then such customers were vital to them, as they still had not passed over to the ‘bad debt’ corner. Banks had to have sufficient incentives to compensate for the loss of these customers. If they faced difficulties obtaining private finance, the JMF suggested pushing in public capital to selected banks with the clause of moral hazard attached. Another approach worked around the problem was to defer classification of an account as a bad debt for a certain number of years until so that capital provisions would be made by the operating profits of the bank without loss.
This only meant delay in the resolution of issues. (Lamb, 2004) On the issue of corporate restructuring, banks would need to take the lead in ironing out restructuring plans with potentially rewarding debtors and phase out non-performing entities. Unwanted loans could be given to public sector organizations like the Industrial revitalization Corporation or private investors. The ICC along with the Resolution and Collection Corporation (RCC) had key roles to play in the sales and purchase of NPL’s.
These organizations would play their part in structural changes soon to be implemented to generate investments and new jobs. This would boost the ‘social safety ‘network which could expand to housing, child care and health care benefits. Given that investor confidence was low, the JMF members sought to hammer out a medium term policy aimed at shoring up confidence in Japanese government securities. The committee was also aware that if restructuring policies worked there would be a resurgence of activity. Key reforms would have to be carefully worked out.
What the committee suggested was: More cost benefit analysis before allocating funds to the rural public projects so that resources would not be spread out thin on social safety nets or training programs for workers needing to be re skilled in the new set up. Tax reform, including broadening of the personal and corporate income tax bases, perhaps with cuts in effective corporate tax rates (early introduction of taxpayer identification numbers would facilitate such base broadening); Curbs on health care were outlaid while creating a tier of pension and old age benefits.
Speed up pace of restructuring and reforms in government structures. (Dos, 2006) On monetary policy, there was broad agreement—including in the Bank of Japan itself—that the policy actions taken were unlikely to produce an early end to deflation. Research nevertheless suggested that more could be done for monetary policy while bank weaknesses are clearly undercutting the effectiveness of monetary policy, the monetary delivery mechanism including portfolio-reorientation —did appear capable of producing results. IMF staff sought an end to deflation within a reasonable time.
The yen continued to be a cause of concern in countries, which adjusted their currencies around the US dollar. The JMF stressed that even while regional impacts caused by movement around the dollar, should not impede a stable monetary policy, which would eventually eliminate deflation. The yen could be better controlled given that exchange rates were more flexible and stronger funds position. Strategically, if monetary controls were relaxed after reforms were ushered into Japan, a weakening of the yen would be short term.
More to the point was the fact that on the back of comprehensive reforms, investor confidence would be high on Japan, reducing any downside of currency fluctuation. (Deb, 2006) In conclusion, it should be stated that after the Second World War, Japan rose to be an economic superpower aided by large dollops of American aid. Now, America observes Japan on the path to economic reforms for lessons it could pick up on the way. The US at one time seriously considered adopting Japanese style financial reforms before it decided it would not use public funds to bail out private industry.
Japan has shown the tenacity to overcome all odds. Even though the 1990’s crisis still makes its impact felt Japan is well on its way to structural reforms. A strong yen now buttresses the economy and any structural imbalance is more than made up for by this fact. Japan showed that public funds could be pumped in to restore balance to prop up the private system. The system of consensus in Japanese government functioning may be restrictive but what requires to be done is done thoroughly.
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