Japan announces 62 bn bailout plan for banks

The amount of public funds to be channelised into each of the institutions ranges from 150 billion yen for Chuo Trust to one trillion yen for Fuji Bank. The bailout money was granted on promise that the banks would hence manage their finances better. No accoutability was pressed on the managers of the 15 banks responsible for this phenomenal misconduct.

quot;With this we will be able to genuinely restore the financial system. I feel we have got through a big part of the work,quot; finance minister Kiichi Miyazawa said.

The banks will receive the money just before they close their accounts for the financial year and will use it to restore their shaky capital levels.

The banks promised to reduce their staff by 20,000 over several years, worsening the already bad employment situation and are being allowed to write off that debt entirely and with the government-given money they are to start afresh lending money to the enterprises. Under American and western pressure, the Japanese government put together the scheme to bail out the banks with public money despite popular opposition.

Meanwhile, Japan8217;s economy shrank for an unprecedented fifth quarter in a row in the last three months of 1998 and economists say the setback may force the government to ponder more policy steps, despite its public show of optimism. The Economic Planning Agency EPA said on Friday that gross domestic product GDP shrank 0.8 per cent in the October-December period from the previous quarter. GDP also contracted 2.8 per cent in calendar 1998 as a whole 8212; the worst decline on record. The quarterly drop confounded predictions by private economists, who had expected GDP to shrink but not that much, and overturned earlier predictions by EPA chief Taichi Sakaiya of positive growth.

Just a little over an hour after the GDP data was released, the Bank of Japan BOJ said its policy board had decided to stand pat on monetary policy, sticking to its goal of driving a key short-term interest rate to nearly zero, but declining to take more aggressive quot;quantitativequot; steps by targeting inflation or money supply.

The policy board, as widely expected, decided by a majority vote to keep guiding the key overnight call rate as low as possible, the bank said in a statement. The gloomy growth data could well put more pressure on authorities to take further policy steps, although public spending has already created a massive budget deficit and interest rates are at rock-bottom levels.

quot;Calls for further monetary steps, tax cuts and fiscal stimulus measures could mount after April since these figures showed the economy was really mired in recession,quot; said Tomoko Fujii, an economist at Nikko Salomon Smith Barney.

quot;Although Sakaiya said the economy has stopped falling, we cannot at all feel relieved,quot; she said. quot;Unless growth in January-March turns positive, it will be next to impossible for the economy to achieve 0.5 per cent growth in fiscal 1999/2000.quot;

Despite the October-December fall, EPA chief Taichi Sakaiya said the economy had stopped declining, although conditions remained severe and Japan8217;s jobless rate, already at a record, was likely to rise as firms restructured.

But Sakaiya predicted that demand for housing would pick up in April and that consumption generally would improve with the aid of existing government steps and the recent credit easing by the Bank of Japan. Asked if new steps were needed, Sakaiya said: quot;With all the measures the government has taken and with interest rates having been cut so low, I8230;think consumption will pick up.quot;

Policy-makers have been touting their view that the economy has hitbottom and financial markets have been bouyed by hopes that the official line may be coming true. Analysts were divided on how badly market players8217; hopes would be hit by the GDP data.

quot;For the market as a whole, it8217;s likely to have a dampening effect,quot; said James Malcolm, an economist at JP Morgan.

Others were not so sure.quot;The optimism is related more to consumption and housing rather than capex capital spending8230;so I don8217;t think it is going to change expectations all that much,quot; said Brian Rose, economist at Warburg Dillon Read, adding that in his view a real recovery was quot;a long, long wayquot; off. Few economists believe a domestic demand-led recovery will materialise in the business year beginning in April.quot;Temporary gains in consumer spending as a result of retailers8217; efforts to stir up consumption last year had few ripple effects in the overall economy, with the economy likely to be supported only by public works spending in the next two or three quarters,quot; said Yasuyuki Komaki, senior economist at NLI Research Institute.

EPA8217;s Sakaiya said Japan would not achieve the government8217;s target of only a 2.2 per cent decline in GDP in the year to March 31, but said there was no need to change that target or its official pledge to post growth of 0.5 per cent in 1999/2000. Despite the BOJ8217;s decision to keep monetary policy on hold for now, speculation persists that the central bank will be forced to move further down the path of a quantitative easing later in the year, perhaps by increasing its outright purchases of government bonds. The BOJ last eased monetary policy on February 12, when it lowered the target for the benchmark overnight call rate to an initial 0.15 per cent from 0.25 per cent and said it would push the key rate lower if needed.