METI rushes to adopt anti-SLAM policies

When you are trade minister and the economy is in trouble, the last thing you need is to get SLAMMED!!!

Thursday, February 12, 2009

ANALYSIS: Exit Strategy Needed As Govt Role Expands

TOKYO (Nikkei)–The Japanese government is becoming more active in combating the ongoing downturn, and while such efforts might be necessary, an exit strategy must be formed so that the economy is eventually able to thrive without life support.

The government is under immense pressure to take action amid the crisis. In early January, the Ministry of Economy, Trade and Industry (METI) hastily created a program to inject public funds into nonfinancial firms. Late last year, METI was flooded with complaints — not only from small and midsize companies, but also from big ones — about the difficulty of securing loans from banks and fundraising through the issuance of corporate paper and bonds.
…
The trend toward greater state involvement seems clear in Japan, with ruling-coalition lawmakers and business leaders now calling on the government to save jobs.

“Speed is essential,” said METI Minister Toshihiro Nikai. “Unless we do something now, we will be slammed (by criticism).”
…
Private-sector activity is essential to healthy markets. Without an exit strategy, the Japanese government and the BOJ will find it difficult to withdraw to their proper supporting roles, and the Japanese economy will be worse for it in the long run.

Given that the current crisis is arguably the worst since the Great Depression, the government and BOJ likely have little choice but to take action.

I realize this is a semi-serious argument against how offering protection to industry over short-term concerns could crowd out the private sector and possibly lead to a deleterious trade war. But Nikai has it wrong — come September at the latest, the LDP is going to get totally SLAMMED no matter what.

And weren’t “the Japanese government and the BOJ” already fulfilling a fairly intrusive role in the Japanese “markets”? Sure, many of the lost decade/Koizumi-era programs had been put to rest, but not that long ago. Japan remains full of so-called “zombie” companies kept afloat by previous bank bailouts and the like, but these new measures outlined in this article would presumably create a new breed of these – companies that would be insolvent without direct government support (or indirect through government-mandated loans). So while I share the Nikkei’s concern that the government of Japan will soon essentially become the “main bank” of a sizable number of companies, I just want to mention that rather than going from a state of being merely in a “supporting role” to an active role, these measures appear to push the GOJ from an already pretty active role to a very active role.

6 thoughts on “METI rushes to adopt anti-SLAM policies”

  1. INTO THE WALL!

    But seriously, “speed” and “government” are really not going hand in hand these days. It doesn’t make much sense. Private financial institutions can churn these things out overnight, yet it takes governments (which are often staffed by essentially the same people) months and months. Of course the politicians are afraid of doing the wrong thing and making certain voters angry, but at the same time, inaction is making all the voters angry.

    It’s all very frustrating, and it gets me in the mood to start a kibbutz in the middle of Yoyogi Park or something.

  2. Well what they ARE doing seems very questionable indeed. The first reaction from the Aso govt when faced with a “credit crisis” was to try and force banks to lend to small local firms, so as to keep them alive, presumably through election season. When you have bad loans by banks already rising through September before the massive upheaval, you have to wonder how wise it is for banks to actually put that money out there.

    In what I have read about the 1997 Asian financial crisis, one of the things that made it worse than it had to be was that when IMF intervened, it loudly announced that the fundamentals of Asian capitalism were flawed and corrupt while at the same time trying to “restore confidence” by injecting funds to cover loans. The result was that the foreign investors got even more spooked and continued panic selling. I can’t help but see parallel here — in both the US and Japan, I think the reluctance of the government to really tell the truth about the true state of the economy is just making things worse. In Japan, we get sympathy and money for big manufacturers when the demand for their goods plummeted by a fifth and is expected to fall further, while in the US the big banks are in serious trouble yet the govt refuses transparency on whats happening with TARP funds and is allowing all sorts of fancy accting for the banks’ capital structures. I say it is better to take the pain of knowing how bad things are NOW and then work through it.

  3. From the Economist:
    ****

    The new framework has four main planks. Banks will have to undergo a “stress test” to ascertain whether they have enough capital to absorb future losses in the event of a severe economic decline. Those that do not will have access to “contingent equity”, in the form of preferred shares convertible into the common sort. This will ensure they are strong enough to “preserve or increase lending”.

    Second, after much debate the Obama administration has settled on a public-private approach to tackling the troubled mortgages and other assets clogging up balance-sheets. The idea is to tempt up to $1 trillion of private capital off the sidelines to buy this debt, by offering some form of government co-financing. With private firms determining the price, there should in theory be less risk of misvaluing securities. But the concept remains vague, and the devil will be in the details.

    The third component may be the most promising. Using more seed money from the Treasury, the Federal Reserve will quintuple the size of its $200 billion programme to finance purchases of securities backed by car, credit-card and student loans. It will also expand beyond consumer credit to bonds linked to commercial mortgages. This marks a big step in the government’s efforts to plug the gap left by the collapse of non-bank funding, particularly securitisation. Hedge funds are said to be keen to buy such paper with Fed help.

    A smaller amount will be set aside to deal with the problem at the heart of the crisis: housing. Some $50 billion will be channeled into preventing “avoidable” foreclosures, though it is not clear if this will include write-downs of principal, which many economists say are needed to stop the rot as more homeowners slip into negative equity. Banks that receive public money will be required to set up loan-modification schemes that are consistent with guidance from the Treasury. More details of the housing plan are expected over the next week.

    Mr Geithner’s plan places a number of other constraints on banks that receive support: they will not be able to take over healthy rivals for cash until they have repaid taxpayers, for instance. And they will have to disclose a lot more about their dodgy assets and loan volumes. But they will no doubt feel that things could have been worse. Banks will not, as some feared, be subject to lending quotas, at least officially. And their managers will keep their jobs.

    ****

    Obama said elsewhere that the US has some kind of philosophical aversion to nationalization, but what is this plan with its preferred shares besides an effective delay of nationalization?

  4. Of course I forgot to link or give the conclusion of that Economist article, which I have to say we all have no choice but to agree with:
    ***
    Moreover, Mr Geithner’s plan treads gingerly around a problem that many economists would rather see tackled head-on: some of America’s largest banks could already be insolvent. For these, nationalisation may be the best option. That is hard to swallow in the land of laissez-faire capitalism, even today. On Tuesday Mr Geithner reiterated his determination to keep banks private where possible, saying: “Governments are not good at running banks.” But taxpayers are in no mood to prop up basket-cases. All eyes will be on those stress tests in the coming weeks.
    ***
    http://www.economist.com/world/unitedstates/displayStory.cfm?story_id=13095259&source=features_box_main

  5. Joe is right. Bring on the voluntary communes. As soon as we can figure out how to run an airline kibbutz-style I am totally onboard.

Comments are closed.