BoJ urges use of funds to bail out banks By David Ibison in Tokyo and Alan Beattie in Washington Published: September 26 2002 11:39 | Last Updated: September 26 2002 20:28
The Bank of Japan on Thursday urged the government to use a ¥15,000bn ($125bn) emergency fund to bail out the country's banks - the first time it has sanctioned government access to the money and an admission that a crisis is pending.
This is the latest sign that measures to be announced in October to deal with the banks' bad loans could include a direct injection of funds and comes the day after Masajuro Shiokawa, finance minister, backed a bail-out. It is also the first indication of how any potential injection could be financed.
The call came as Paul O'Neill, US treasury secretary, on Thursday stepped up pressure on Japan to act on its economic crisis. Speaking ahead of today's Group of Seven meeting of finance ministers and central bank governors, Mr O'Neill went further than before in demanding a clear strategy from Mr Shiokawa, with whom he has a meeting this afternoon. "One of my questions for the minister when he comes for our bilateral meeting is 'exactly what it is you're doing?'," said Mr O'Neill.
Mr O'Neill has previously publicly advised the Japanese authorities to clean up the banking system by writing off non-performing loans, but his remarks on Thursday were a sign of increasing international exasperation at the policy paralysis that appears to be gripping Japan.
The treasury secretary said he would ask Mr Shiokawa: "Assuming that your interventions will do exactly what you hope for them to do, what will be the change in gross domestic product achievement in Japan in the next 12, 24 and 36 months?"
Mr O'Neill said the Japanese economy would by now be 43 per cent larger if it had not languished close to or in recession over the past decade.
One of Japan's main obstacles to a capital injection was legislation that meant the emergency fund could not be used unless the government admitted a crisis was under way. This placed the government in the position of trying to prevent a financial crisis after it had happened.
The BoJ's stance is designed to allow the government to move from crisis response to prevention. It is understood the BoJ's plan involves getting the banks to assess the size of their bad loan portfolios, increase provisions for these loans and receive an injection of capital from the ¥15,000bn fund to shore up their capital bases. The BoJ believes legislation could be re-interpreted to allow the government access to the ¥15,000bn.
