Asia Woes Push Japan to Bold Bailout

Taxpayers will bear the cost of bank rescue, even as they are told of a $16 billion tax cut.

First Thailand, for $17 billion. Then Indonesia at $38 billion and South Korea at $57 billion. Now the Asian bailout parade has reached Japan, although this country is turning to its taxpayers, rather than the international community, for assistance.

Saying he did not want Japan to trigger a worldwide recession, Prime Minister Ryutaro Hashimoto announced a small but unexpected $16 billion tax break for individuals yesterday to boost a sluggish economy.

And more details emerged about a plan to issue $77 billion worth of government bonds to help the debt-saddled financial industry.

These measures represent Japan's first major effort to keep the Asian financial crisis from hobbling the world's second-largest economy.

The tax cut also responds to a US demand that Japan spur consumer spending - which would create a bigger market for American products - and not revive its economy by relying solely on a boost in exports.

The package's early reviews were good, though some economists say more money is needed. US Ambassador to Japan Thomas Foley called the tax cut a "positive beginning."

Promoting "the health of the Japanese economy itself is the most important thing that we believe can be done to strengthen the region and to ensure that the problems elsewhere in Asia don't spread," he said.

Hashimoto hopes to restore confidence on two levels. The surprise individual tax cut and a proposed corporate tax break are designed to inject vigor into Japan's economy, which has been stagnant for nearly the entire decade, and thereby lift the region. "It's an indication of the degree of concern by the Japanese government and the expectation is that they do more," says Ram Bhagavatula, a senior economist at Citibank in New York.

The politically unpopular bond-issuance plan is intended to convince the world that Hashimoto's ruling Liberal Democratic Party (LDP) has the resolve to repair a financial industry burdened by hundreds of billions of dollars in bad loans and tarnished by bankruptcies.

The move runs counter to previous LDP policies that were opposed to worsening Japan's deficit and the use of public funds to rescue financial institutions. Hashimoto also appears to have ignored the powerful bureaucrats in Japan's Finance Ministry, who are even more opposed to deficit-boosting steps like tax cuts.

Currency consultant Barbara Rockefeller of Rockefeller Treasury Services doesn't think the individual tax cut will prompt a lot more spending by consumers, since the country will remain a nation of savers. However, the Stamford, Conn.-based consultant says business "will roar" because of its tax cut. And the business spending, she says, will benefit all of Asia since some of this money will be invested in new factories in other countries. "If the Japanese use the money to increase their investments, that mitigates the crisis in other countries and does save the region in a bigger sense," Ms. Rockefeller says.

The tax-cut proposal "gives me the impression that the government is serious and acknowledges its problems," says Yasunari Ueno, chief economist at Fuji Securities in Tokyo. "The question now is when and how Hashimoto can actually carry out these plans. Japan is always slow in putting things into action."

Another question is how Japan will react to the use of public money to bail out the financial industry, a tactic the LDP has only grudgingly accepted. As with the US response to the savings-and-loan crisis of the 1980s, the official decision to spend public money has come late and will cause controversy. Many Japanese are particularly resentful of helping an industry marred by ties with organized crime.

In the spring of 1996, Hashimoto proposed using about $6 billion in public money to liquidate some failed housing-loan companies. The plan prompted popular and political outrage, but in the end he got his way.

Given an inch, Hashimoto is now taking a mile. The 10 trillion yen (about $77 billion) raised from the bonds will be funneled through the government's Deposit Insurance Corporation (DIC) and used to protect depositors and increase the capital base of troubled firms by purchasing their preferred stocks and subordinated bonds.

"Why does he have to use our money to cure ... these financial institutions?" asks Atsuko Fukuda, a Kobe housewife who has gone to work in her husband's printing business to earn extra money in a period of economic uncertainty. "Whatever he says about protecting the depositors, I suspect there are many loopholes again, just like the [housing-loan company liquidation]. What did we pay that money for? To clean up some mistakes caused by banks and their shady associates?"

She is not the only skeptic. A survey by the daily Asahi Shimbun indicates 56 percent of Japanese oppose the bond issuance and 75 percent are against the rescue of institutions that aren't competitive. People are also worried that there seems to be no parliamentary review of how the DIC will spend the money raised from the bonds and how it will choose institutions to save or to let collapse.

Hashimoto's plan "would mean a return to the 'convoy system' rescue formula - having everyone pitch in to bail out banks in a financial pinch - and would revive the Finance Ministry's paternal protection of the banking industry," writes Toru Nakakita, an economics professor at Toyo University in Tokyo, in a recent Asahi article.

"There is no question that the DIC provides a safety net for bank insolvency, but this net is a necessary evil. An enlarged net would give rise to moral hazards on the part of financial institutions and hand greater power to the Finance Ministry," he argues.

Although the markets are applauding the bond issuance, some analysts say it is late and perhaps too little. "Though the strategy is correct to issue these bonds and inject public money on a short-term basis," says Matthew Poggi, an economist at Lehman Brothers Tokyo, "the impact will be very small in the long term.

"Everyone knows that it's not tackling the root of the problem [to apply] only 10 trillion yen.... If Japan expects to achieve a full recovery of the economy, it needs much more than that," he adds.

Johsen Takahashi of the corporate-funded Mitsubishi Research Institute in Tokyo says, "The government's decision to issue such bonds was correct." But he adds that it would have cost Japan much less to have acted earlier.

* Monitor writer Ron Scherer in New York contributed to this report.