In Japan there are signs that the government is ready to tackle the bad debts problem plaguing Japanese banks. Analysts applaud the plan to close problem banks but recognize the adverse effects that action will have on employment and business confidence.
Japanese commercial banks are holding bad loans worth over $420 billion. The government's financial services agency suggests that by the end of this month it will tighten reserve requirements to safeguard the position of healthy banks. That action could cause weaker banks to collapse.
Arthur Alexander, president of the Japan Economic Institute in Washington and long time observer of Japan's financial sector, says Japan is about to enter a six to nine month period of severe economic distress. "It means banks going under," said Arthur Alexander. "Banks being taken over by the government. A lot of borrowers who are essentially bankrupt, not being able to pay back their loans and going under. Some going out of business. It means unemployment and a lot of disruption."
As serious as the problem is Mr. Alexander does not believe Japan's financial crisis will have much impact on the rest of the world. He stresses the gradual withdrawal of Japanese banks from overseas operations during the past ten years of economic stagnation in Japan. "Foreign banks and foreign correspondent organizations with Japanese companies have recognized these problems for years," he said. "So they have been taking a great deal of care in their exposure to Japan. There are some people who will be hurt [by the closure of problem banks] but it is not going to be a major systemic, global problem."
The financial position of Japanese banks weakened in large part because of the deflation (actual price declines) that has afflicted Japan for the past five years. In a process known as debt deflation, as companies were hit by falling prices and incomes, they were unable to service their debts or sold assets to do so. Defaults and asset sales drove prices down further, thus deepening the debt problem. Japan's public debt has been growing steadily and now exceeds 150 percent of national income.