>Date: Thu, 17 Feb 2000 11:29:05 -0500 (EST)
>To: lbo-talk at lists.panix.com
>From: bhandari at mmp.princeton.edu (Rakesh Bhandari)
>Subject: Re: the class struggle
>
>Christian writes:
>>Japan isn't a case of fiscal impotence, but stop-start fiscal austerity.
>>From 1993-96, the %age changes in central government spending have been .2%,
>>1.0%,-2.9%, 5.8%, respectively.
>
>Isn't the point that despite the 'timidity' of such % change in fiscal
>expansion the debt/GDP ratio just simply mounts? Why this is so begs for
>some explanation.
>
>>Besides, how
>>much do you want to bet that, come next recession, US discretionary spending
>>caps go out the window?
>
>Of course it will have to go through the roof because revenues will crash
>as well. But as the debt/GDP ratio also skyrockets, how far up disc
>spending can go remains a great question especially if big government
>spending inspires fear of destabilizing inflationary pressure and future
>onerous taxes and undermines further private investment. The working class
>will need be prepared to take the situation in its own hands, instead of
>waiting for the govt to find a solution or accomodating itself to the
>situation by, say, trying to move back to the land in Waltons-like fashion
>(should be plenty of reruns of that show in the future).
Rakesh, what do you think of the news below? Yoshie
***** The New York Times January 29, 2000, Saturday, Late Edition - Final SECTION: Section A; Page 1; Column 5; Business/Financial Desk LENGTH: 1402 words HEADLINE: Japan to Turn To Direct Loans From Its Banks BYLINE: By STEPHANIE STROM DATELINE: TOKYO, Jan. 28
In a striking demonstration of how precarious Japan's financial situation has become, the government plans to borrow money directly from banks to fulfill its obligations to local governments.
Governments normally borrow money by issuing bonds, which is cheaper than taking out bank loans. Japan's unorthodox approach to borrowing now and the size of the shortfall -- 8 trillion yen, or roughly $76 billion -- have stunned economists and other market watchers. With one small exception, this is the first time since the days after World War II that Japan has taken such a step.
The amount is equivalent to roughly 2 percent of Japan's gross domestic product, and exceeds the 7.7 trillion yen the government has injected into troubled banks.
"The funding mechanism is breaking down," said David Asher, a research fellow in the Japan Program at the Massachusetts Institute of Technology. "The dam is showing more and more stress fractures, and they're trying to put plaster on them."
Concern is rising that Japan is overextending itself. The government's debts now match the country's G.D.P., and Merrill Lynch is predicting a rise to 150 percent of G.D.P. in two years.
The skyrocketing debt, justified by politicians as a way to keep a faltering economic recovery on track, is increasingly a point of contention within the ruling Liberal Democratic Party. But by sidestepping the reliance on the bond market, the new borrowing has placed a stark new emphasis on this crushing problem.
"By not issuing bonds, by taking on an intermediary like a bank," said Jesper Koll, who is chief economist at Merrill Lynch Japan and is typically upbeat about Japan's prospects, "you are basically saying one of two things: either you don't believe in the efficiency of the financial markets or you're admitting you have a credit problem."
Now, Mr. Koll said, the government runs the risk of replicating, on a smaller scale, the trap that brought many Asian economies to their knees recently. "There's a mismatch because they're planning to borrow one-year loans, but the municipal deficits are not going away in a year," he said. There are signs, too, that the government may expand its borrowing from banks, which are healthier than they were two years ago. A Finance Ministry spokesman said there were plans to cover shortfalls in another, unnamed "special account" this way, though the amount in question is far smaller.
The banks, for their part, are likely to welcome the plan. Although the Finance Ministry spokesman stressed that terms had not been set, the Nihon Keizai Shimbun, Japan's leading financial daily, said the government planned to pay 2.1 percent interest -- a handsome premium to the 1.6 percent the banks could earn buying government bonds.
Andrew Smithers, a prominent fund manager, is one of the few experts who put a positive spin on the plan, saying it will get more money into circulation, which many economists have advocated as a way of curing the economy's ills. Because loan demand is low, banks have too much money sitting idle. "It's a good measure," he said, "because it further eases monetary policy and relieves pressure on the bond market, which will help lower real long-term interest rates."
Japan has been suffering from a classic "liquidity trap": while an exorbitant amount of money is available for lending, companies and individuals are not borrowing as they try to reorganize their activities. Thus, the money is bottled up in the banks, idle. While most people see the move as a sign of government desperation, it may also help some banks facing shrinking loan demand.
Masaaki Kanno, senior economist at J. P. Morgan in Tokyo, is also unconcerned. "Japanese commercial banks are the largest buyers of government bonds," he said, "so there's really no change."
The government is battling to keep its ballooning deficit in check in the face of continuing signs that the economy is addicted to stimulus measures that require more and more debt.
In a speech to Parliament today, Prime Minister Keizo Obuchi said getting the economy on its feet would take precedence over paring the national debt. "Fiscal reform is important," he said, "but we cannot commit the mistake of undertaking it while the economy is not firm and before it is on the path of full-fledged recovery."
Yet highlighting the discord within the government, Finance Minister Kiichi Miyazawa bemoaned the fact that the proposed budget would push government debts to 645 trillion yen, or $6.15 trillion.
Economic prospects are not bright. The Japan Center for Research estimates that G.D.P. fell by 1.6 percent in the latest quarter, suggesting that the government will have trouble meeting its target for 0.6 percent growth this year.
Hiroyuki Inoue, the center's senior economist, said the figures demonstrated that when government public-works outlays end, the economy falls right back into the doldrums. "After the effects of government spending programs faded last summer," he said, "the economy slipped back to the level it hit in 1998."
He expects the situation to change as the latest stimulus package starts kicking in. But the center's figures still suggest that the economy is far from able to sustain itself, even though Mr. Obuchi promised today that there would be no new spending beyond the record $810.8 billion budget he has proposed.
The Finance Ministry spokesman said the decision to borrow from banks rather than float bonds was merely an effort to segregate the funds, which will go into a special account for local governments. He said it had nothing to do with the government's ability to raise money, an assertion confirmed by two recent bond auctions.
But that makes the plan even more puzzling. Economists speculate that the government is wary of issuing more bonds than it has to, fearful of jeopardizing any recovery by pushing long-term rates higher. "They're afraid of upsetting the bond market," said Ronald Bevacqua, senior economist at Commerz Securities in Tokyo.
The government also wants to avoid drawing additional scrutiny from credit ratings agencies. Many economists say Moody's Investors Service, which withdrew its triple-A rating of Japan's sovereign debt last year, is poised to downgrade its assessment even more later this year. Standard & Poor's, though, recently reaffirmed its triple-A rating.
The ministry spokesman said the new plan was nothing more than a response to the fact that traditional sources of financing have fallen short. The government has traditionally been able to tap the 253 trillion yen postal savings system, but many 10-year deposits will mature soon, leading many economists to predict that money will flow out of the system in search of higher returns. The post office in Japan is the de facto largest bank in the country.
The spokesman stressed, however, that the outflow should dwindle after two years, at which point the government might be able to dip into it again.
Similarly, Mr. Koll noted that the post office took in 1.1 trillion yen in new deposits last month, suggesting that Japan's ever-so-cautious investors may prefer earning 0.28 percent over 10 years to risking their life savings in the market.
The decline in tax revenues coupled with a decreasing ability to tap the postal savings system left the government with a gaping $76 billion hole when it came time to give local governments their share. "Can they keep spending money to cover the deficits of the local governments and in the pension system?" Mr. Asher asked. "If the answer is no, there's going to be a crisis."
The government has resorted to direct borrowing at least once before, to cover shortfalls in a special account for national forestry projects. But the account for local government is different, said Kunji Okue, an economist at Dresdner Kleinwort Benson in Tokyo.
"Borrowings for national forestry projects are used to manage and cultivate national forests and parks and can thus be viewed as an investment expense," Mr. Okue wrote in a recent report.
Also, he noted, the amount borrowed for the forestry account was far smaller. "This is the first time since the end of World War II that Japan has undertaken large-scale direct borrowing to cover recurring expenses," he said.
The last time the United States resorted to a similar move was in 1893, when J. P. Morgan provided gold to help the Treasury.
LOAD-DATE: January 29, 2000 *****