Why is U.S. urging Japan to dispose of bad loans

Akahata of July 17 and 18 carried an article answering a frequently asked question: Why is the U.S. urging Japan to dispose of its banks' bad loans?

Writing off bad loans held by Japan's major banks was a focal issue in the recent two Japan-U.S. summits, one in March attended by former Prime Minister Mori Yoshiro and the other in late June by Prime Minister Koizumi Jun'ichiro.

What has emerged from the various views expressed in interviews with Akahata is the arrogance of the U.S.


Lest stagnant Japanese economy affects the U.S.

A Federation of Economic Organizations (Keidanren) leader said, "If Japan's economy goes wrong, the failure will adversely affect the U.S. economy." This is a view that coupled with the slowdown of the U.S. economy, the Japanese economic downturn will adversely affect the economies in Asia, which in turn will affect the U.S. economy. U.S. financial institutions fear that their investments in Asia may become irrecoverable.

At a news conference following the Japan-U.S. summit on June 30, U.S. President George W. Bush said, "It is in our nation's best interests that the Japanese economy flourish and is strong and vibrant."

Obviously, Bush stated this view on the premise that bad loans are actually preventing the Japanese economy from bouncing back.

Yanbe Yukio, professor at Kobe Gakuin University, said, "That argument is based on a wrong premise," pointing out that bad loans persist because the economy is in recession, not that the economic recession persists because bad loans exist. U.S. banking differs from Japan's basket method, as U.S. banks grant loans to individual projects. If Japan's banks write off their bad loans, it will nip the bud of economic recovery, Yanbe said warningly.

The U.S. refers to the resolution of the failed Savings and Loans in the 1980s as a lesson for Japan to take.

Kanamori Hisao, councilor of the Japan Economic Research Center, argued against this. He said, "The U.S. and Japan have different backgrounds. In the U.S., reckless loans that S&L's granted caused the trouble. In Japan, the present bad loans arose mainly from the contraction of demand following the burst of the bubble economy. If personal consumption is stimulated and demand increases, bad loans will eventually disappear."


U.S. investment groups seek business opportunities

Kumagai Katsuyuki, head of the intelligence department of Teikoku Data Bank, said that the U.S. objective is to provide U.S. investment groups with business opportunities to make gains from Japan's bad loans.

These U.S. investment groups, sometimes called "vulture funds," buy failed companies, reconstruct them and sell them for greater profits. The more write-offs that result in bankruptcies, the more business opportunities these investment groups will find to make profits.

U.S. Ripplewood Holdings bought the failed former Long-Term Credit Bank of Japan, on which 4.5 trillion yen (40 billion dollars) public money was used, for only 1 billion yen (9 million dollars). It also bought three Japanese companies at 1.8 billion yen (14 million dollars), including the failed Sea Gaia resort complex on which 200 billion yen (1.6 billion dollars) public money had been used.

In the Japan-U.S. summit talks on June 30, the U.S. president took the trouble to refer to the need for Japan to promote U.S. and other foreign direct investments. The reference was apparently intended to be in the interests of U.S. investment bank groups looking for increased merger and acquisition opportunities in Japan by buying up shares of failed or failing Japanese companies.

The Japan-U.S. summit talks confirmed launching a dialogue on fiscal and financial matters, including the write-offs of bad loans of Japanese banks. Glenn Hubbard, chairman of the U.S. Council of Economic Advisors (CEA), revealed that he sounded Takenaka Heizo, Japan's state minister in charge of Economic, Fiscal, and IT Policy, about the concept of this new Japan-U.S. consultative body (Asahi Shimbun, evening edition, May 23). Mr. Hubbard has proposed such a body in which financial people from U.S. private sectors participate, on the pretext that it will be helpful for Japan to hear about U.S. experience in getting rid of excessive corporate debts.

To U.S. financial institutions which have rich the know-how of selling loans, Japan will be a treasure box of opportunities for the "bad loan" business.

To maintain mechanism to funnel Japan's money to U.S.

There is a way of viewing the bad loan question in international capital flow.

Okumura Hiroshi, an economic critic, supports this view, saying, "It may be because the U.S. is concerned about the possible poor flow of Japan's money to the U.S., if banks operations turned bad.

Despite its enormous trade deficits, the U.S. to date managed to keep its bubble economy. This is because an international mechanism existed to funnel European and Japanese money to the U.S. After the 1985 meeting of central bank governors of five major countries (G5) and the Plaza Agreement, Japan's official rate was basically kept lower than that in the U.S. By manipulating to maintain Japan's interest rate always lower than the U.S. interest rates, Japan's money will drain out of Japan into the U.S. in search of higher interest payment. This inflow of money helped to support the high U.S. stock prices and make up for a big deficit in the current balance of payments.

Imamiya Kenji, professor emeritus of Chuo University, said, "The U.S. many times lowered its interest rate amid the economic recession, and is therefore concerned about the possible drain of the dollar. If the dollar flows out of the U.S., U.S. stock prices will fall. The U.S. wants Japan to join the league for supporting these two indicators."

In his view, Japan with almost zero interest rates cannot afford to lower interest rates. What attracted U.S. attention is the bad loans held by Japan's major banks. The U.S. began to think that Japan's financial institutions will be encouraged to buy U.S. stocks and national bonds if they can clean up a mountain of bad loans.

Most of the targets of write-offs are the loans the major banks hold against small- and medium-sized enterprises. To put it more bluntly, the U.S. wants major banks to withdraw their non-performing loans from these enterprises and to funnel the freed up funds to the United States. U.S. presidential aide Lawrence Lindsey in charge of economic affairs said to Nikkei Shimbun on June 21 that the high dollar will continue as long as there is inflow of capital to the U.S.

In the Japan-U.S. summit talks Prime Minister Koizumi pledged that no economic panic of Japanese origin should take place and that he would bring success to settling the bad loans question by listening to U.S. opinions. The U.S. took this as a vow to always secure the inflow of funds to the U.S.


'A weak Japan' cannot work as U.S. ally

Imamiya also pointed out that Japan's bad loan issue has a direct bearing on U.S. world strategy. In U.S. thinking, a robust economy of Japan as a result of economic recovery is a prerequisite for Japan to play a greater role in U.S. world strategy which is increasingly focused on Asia.

Mass media reports cite some Finance, Economy, Trade and Industry ministries officials as saying that they heard many times from senior government officials of the U.S. Republican administration about the need to give more importance to the Japan-U.S. alliance. U.S. government officials said that an economically weak Japan is undesirable to the stability of East Asia, in particular to relations with China (Asahi Shimbun, June 20).

In October 2000, a special report came out by the Partisan Study Group on U.S.-Japan Relations, under the title "The United States and Japan: Advancing Toward a Mature Partnership." The report was drawn up by the Institute for National Strategic Studies, National Defense University (INSS), with Richard Armitage, deputy Secretary of State, at the center.

The Armitage report includes the following paragraph: "(Japan's) continued frailty has meant lost opportunities for American workers and businesses. A weak Japan contributes to volatility and uncertainty in global capital flows. In addition, an inward-looking, frustrated, insecure Japanese populace will be less willing or able to play a larger role in the alliance."

This means that the U.S. thinks that "an economically healthy Japan" is essential to ensuring U.S. national interests and to making Japan fulfill its role as an ally.

Efforts to create a "sound economy" for Japan by way of writing off bad loans held by major banks, however, will only help to deepen antagonisms with the Japanese people.

Economic critic Okumura Hiroshi explains this contradiction. "Capitalist rules call for unpromising businesses going bankrupt in the write-off process as soon as possible. From a macro-economic viewpoint, this approach will lead to worsening the economy further. The structural reform based on this approach will by no means be successful." (end)