Japan - von stratfor.com...

verfasst von JüKü, 12.10.2000, 09:39

Japan's Uninsured Economic Future

This week's failure of Japan's Chiyoda Mutual Life Insurance, the
country's fifth insurer to collapse in the past four years, points
to continuing structural weaknesses in the Japanese economy at a
time when business confidence seems to be improving. With Japan's
policy makers still divided over the wisdom of raising interest
rates, the financial weakness of the country's insurance companies
complicates efforts to stimulate renewed growth.

In spite of the Bank of Japan's decision to raise rates by a
largely symbolic 0.25 percent in August, abandoning its long-
standing"zero-rate policy", Japanese borrowing costs remain among
the lowest in the world. On the face of it, low rates are the
logical policy response to the country's economic weakness, which
has seen GDP remain essentially stagnant for the past four years.
The alternative approach - deficit spending to jump-start the
economy - is already being employed on a massive scale, and Japan's
huge public debt is heading for unsustainable levels as a result.

Most disturbing about the current situation is that the combination
of low interest rates and loose fiscal policy doesn't seem to be
doing the trick. The main effect of Japan's heavy deficit spending
has been to drive up the value of the yen, which has done wonders
for economic recovery in the rest of Asia but effectively means
Tokyo is"exporting" its demand stimulus. In spite of a series of
supplementary budgets, Japanese GDP growth is still barely in
positive territory - not nearly high enough to boost tax revenues
and bring under control the snowballing public debt.

Making matters worse is the financial weakness of Japan's private
sector, including banks, insurers and other businesses. Many large
companies are so deeply indebted that low interest rates will do
little to encourage them to borrow or invest more. In fact, it's
been suggested by some"rate hawks" - including BoJ governor Masaru
Hayami - that low rates are making matters worse by keeping badly-
managed companies alive and delaying an inevitable shake out.

The risk of Hayami's no-pain-no-gain strategy is more business
failures at this stage will drive tax revenues lower and bank debts
higher, increasing the risk of a generalized financial crisis in
the near future. But the Chiyoda Life failure demonstrates that
keeping rates too low poses risks as well. Japan's insurance
companies typically owe their customers guaranteed returns on
policies they sold years ago when rates were higher, and the zero-
rate policy has pushed many of them to the well by depressing the
return on their investments.

It's also clear Chiyoda's insolvency has helped to spook the stock
market, which might not matter much in other major economies but
carries special risks in Japan. The country's banks have been
writing off bad debt for most of the past decade, but with
corporate bankruptcies continuing to rise, it seems many banks have
been running to stand still. What helps keep banks and insurers
solvent are the unrealized gains they hold on investments in
Japanese equities - and as the benchmark Nikkei index hit a 19-
month low Wednesday, those gains are being whittled away.

A great deal depends on the whims of investors in the Tokyo market.
If enough of them come to believe what is starting to become
obvious - that no one knows what to do about Japan's growth crisis
and the interest rate policy is a no-win dilemma  - the resulting
fall in share prices could make the financial mess much, much
worse.
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Moin!

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• Japan - von stratfor.com... - JüKü, 12.10.2000, 09:39