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Japan Reform Package Outlines Steps to Fight Deflation, Eliminate 'Bad' Loans - 2002-10-30

The Japanese government has released its much-awaited plan to revive the country's economy and fight deflation. The tough economic measures that were originally expected have been watered down.

Political pressure and protests from top bankers appear to have taken their toll on the government's plan to get Japan's economy back on track.

A compromise package, released Wednesday night, contains steps to speed up the disposal of bad bank loans and to fight deflation.

The plan calls for using public funds to help troubled banks. But Financial Services Minister Heizo Takenaka lost his battle to impose stricter accounting rules on banks, something that had been regarded as a centerpiece of his original, tougher, proposals.

Had the new rules been imposed soon, many banks would have been seen their capital fall dramatically. Many bankers and politicians feared those rules could have caused banks and some companies to fail.

Prime Minister Junichiro Koizumi earlier told reporters that he thought the package would have some muscle. He said it does not go against the reform goals he has set. Mr. Koizumi has pledged to revive Japan's economy, which has stagnated for more than a decade.

The package calls for the creation of a new institution to lend to companies that are financially troubled but still viable, especially small businesses.

Many such companies have seen their financing cut as the government has struggled to clean up the banking industry, which is overburdened by loans that will never be repaid.

The government plan still needs Parliament's approval.

Earlier Wednesday, in a move seen as supporting the government plan, the Bank of Japan governors voted to pump more money into the financial system.

The government is struggling to keep Japan's economy recovering from recession. However, there are warnings the economy could fall back into recession. Unemployment remains at record highs, industrial production is declining, department store sales are falling and housing prices continue to drop.