Financial markets

In 2002, after consecutive quarters of negative growth, Japan seemed to be getting back to shape with healthy signs of an upturn in business with increased exports to the US and Asian countries which seemed to be rebounding out of a protracted depression themselves. However, investment and demand continued to elude Japan’s domestic economy. The household spending levels were still suppressed owing to continuing uncertainty over the banking system‘s state of finances which did not do much to rouse any amount of confidence. Production estimates continued to be low with the output versus potential gap remaining stubborn at around 3 percent.

Job downsizing continued as industry struggled with huge stocks and underutilized capacity. The unemployment level threatened to break all records. Added to the distress was the persistent deflation at around 1 per cent which looked as if would stay for a long time. Even as the economy seemed to be turning ever so slightly, financial markets continued to be pessimistic about any long-term revival. Stock prices hung on at abysmal lows. Cross shareholding, arrangements between financial institutions and industry came unstuck as offloaded stock not worth a penny hung heavily on the market.

The yen rebounding back after a long time did so only because of rising exports and not out of any inherent strength in economic factors. Japanese Government Bonds took a beating and valued at approximately one percent in spite of rising debts. Almost ten years after the crisis broke in the 1990’s, banks and industry continued to show evidence of structural weaknesses, which did not bode well for Japan, considering renewed foreign investor interest in Japan. The rate of Non Performing Loans (NPL’s) was at well above 10% of GDP in the ensuing decade. This was in spite of write offs of over 15% of GDP.

There are fears that more loans would continue to be wiped off as bad debts. Falling profits meant that banks would continue to remain ill equipped in terms of capital provision even as capital adequacy norms were being adhered. Tax deficits and government-preferred shares continue to be a drain on bank finances because of the huge servicing costs downgrading the quality of capital. This has negative implications for Japan’s foreign security holdings. Corporate returns have been low greatly due to the bubble years when funds were spent profusely on deployment of work force and capital was excessively drained to finance expansion plans.

The impact is felt now. (King, 2006) Prime Minister Koizumi’s government did all it could to contain the damage and make structural and other adjustments. A consolidated plan was rolled out which would bring about the necessary corrections and structural adjustments required for banking reforms and deregulation. The pace of change was slow but the much-needed banking sector reforms were underway. Banks were now a lot more aggressive on the categorization of loans and on the issue of disposing off NPL’s and staving off burnouts in the equity markets.

Concerns persisted as to just how big the NPL obligations were. This was precisely because, under the system of bank inspections initiated by the Koizumi government, the big corporate borrowers were addressed. What was not attended to be the huge group of borrowers who represented small business which were potentially weak customers? The action plan did not envisage a complete coverage of the whole spectrum of bad loans for recovery. Instead, it focused on specific time bound recovery plans for only the big banks and not all NPL’s.