Japans core consumer price index fell for the 35th consecutive month in August, down 0.9 per cent year-on-year. Unemployment in August was just below post-war highs at 5.4 per cent. The number of jobless increased by 250,000 year-on-year to 3.6m. To cap this extremely depressing batch of economic data household spending fell 2 per cent in August month-on-month. This seems to indicate that Japan is as much in the grip of deflation as ever and should give the G7 leaders assembled for the Washington summit plenty to muse over. Meanwhile, in an attempt to deflect criticism, Japan's leaders are suggesting that they may be prepared to act more agressively on the bad loans problem that plagues the banking system:
Japan will tell fellow members of the Group of Seven industrialised nations in Washington this weekend that it is prepared to use public money to bail out its debt laden banks, Masajuro Shiokawa, finance minister, said yesterday.
But the veteran politician offered no details of how the potential injections would take place and insisted the bailout would only proceed "if necessary", offering policymakers a range of options to avoid having to abide by this strategically timed pledge. Members of the G7 have been calling for a meaningful resolution of Japan's bad debt problem for many years and Mr Shiokawa's statement is likely to mollify them. But it could backfire if not backed by action. "At the meeting I will stress the importance of banks' liquidation of corporate borrowers in serious trouble. As a result we may inject public funds into banks, if necessary," Mr Shiokawa said yesterday.
Despite the rumours of his demise, Mr Yanagisawa - Japan's Financial Services Minister -was in unrepentant form yesterday, insisting an injection of funds is not needed but making his first public commitment to a scheme that would help the banks by expanding the role of the Resolution and Collection Corporation (RCC).Mr Yanagisawa said yesterday he would accept the use of public funds only if they were used to cover losses incurred by the RCC when it offloaded the loans it had purchased from the banks.The minister's comments neatly capture the core of the debate over how to deal with the bad loan problem. One view - the true bailout scenario - involves public funds being injected directly into the banks, wholesale management changes, a short-term rise in bankruptcies, rising unemployment and potential political and social unrest.The other view - the quasi bailout scenario - involves the bad loans being transferred to the RCC, which will offer a better price for them than previously. This will restore the banks to health but leaves borrowers just as bankrupt as before, but able to struggle on.
Source: Financial Times