> http://www.unpan.org/asia-casestudies.asp
>
> Extract follows, download this paper and many
> others at the link above.
>
> ----------------------------------
>
> Non-Performing Loans as a Result of Deflation
> By Yutaka HARADA (Vice President, Policy Research
> Institute, Ministry of Finance)
>
> Few Empirical Studies on Cause and Effect There
> are various arguments on relationships between
> non-performing loans (NPLs) in the banking sector
> and deflation or long-term economic stagnation in
> Japan. Some argue that Japan's long-term
> stagnation since the 1990s has been caused by the
> delay in the disposition of NPLs and, therefore,
> solving the NPL problem will lead to Japan's
> economic recovery. Others insist that creation of
> new NPLs due to deflation is the main cause for
> the delay in the disposition of NPLs, and that
> the NPL problem could not be solved without
> stopping deflation. Either argument is logically
> possible, but there has been virtually no
> empirical study to determine which is the case,
> due to the lack of long-term data on NPLs. Even
> if it is true that deflation delays the
> disposition of NPLs, there would be no consensus
> as to how to deal with deflation. The purpose of
> this paper is to show empirically whether NPLs,
> defined as firms' excess debts relative to their
> cash flows, are causing deflation and recession
> or vice versa. NPLs are firms' excess debts
> relative to their cash flows (profit plus
> depreciation). A firm's debt, however large it
> might be and however small its collateral might
> be, is not an NPL so long as there is enough
> profit for the firm to pay it off within a
> reasonable period of time. Having defined NPLs
> this way, we can consider possible channels in
> which deflation causes NPLs and vise versa.
> First, let us take up a possible channel in which
> deflation cause NPLs. A firm's profit is its
> revenue minus material cost, capital cost and
> labor cost. When revenue declines due to
> deflation, profit will decrease by the same
> percentage, even if all the costs decline at the
> same rate as deflation. If the rate of deflation
> is 2%, then profit will decline by 2%.
> Furthermore, there are reasons why profit is
> likely to decrease faster than revenue. First of
> all, the amount of principals for debts does not
> decrease by deflation. Second, it is often the
> case that interests do not decline by the same
> percentage as deflation. This is because
> interests tend to be fixed for a few years and
> also because the nominal interest rate cannot go
> below zero. Third, it is quite difficult to cut
> wages because nominal wages have downward
> rigidity. As profit is normally a very small
> percentage of total revenue, profit could be
> reduced drastically for the three reasons cited
> above. Thus, we have identified the mechanism in
> which deflation leads to a decline in profit and
> an increase in excess debt. Furthermore, we can
> think of the effect of the decline in profit,
> which leads to a decrease in corporate
> investment, affecting aggregate demand due to the
> multiplier effect.
>
> ------------------
> Posted by C.Jannuzi
>
>
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