By Anne D. Picker, International Economist,Econoday
Monday, October 28, 2002

The saga of Japanese economic reform continues. Once again the government postponed publication of its plan to reverse the drag of bad loans on business. Political infighting continues to water down proposals made by new Financial Service Agency head, Heizo Takenaka, to restructure the banking sector. Doubts about the leadership of Prime Minister Junichiro Koizumi have resurfaced as a result of the confusion surrounding the postponements. It is barely three weeks since Koizumi appointed Takenaka and told him to reform the banking sector. Now they are scrambling to convince increasingly skeptical observers that plans are on track. The latest crisis follows postponement of a new economic package to end deflation. Now both packages should be ready by the end of the month (Halloween) along with the Bank of Japan's strategy for further easing monetary policy.

In the financial markets, investors initially reacted with alarm at the prospect of a plan to end the bad loan situation. Share prices fell as traders digested the news that a serious reformer was taking on the task. Total non-performing loans - those that borrowers have failed to repay on time or in full - now amount to around ¥52 trillion ($416 billion). Any lasting solution will have to force the banks to make proper provision for bad loans, putting at risk their capital adequacy ratios. Making progress in writing off these loans will likely mean more corporate bankruptcies and higher unemployment. With so much at stake, it is hardly surprising that those with most to lose have resisted reform. Many banks and companies would prefer to struggle on and put off the inevitable shake-up.

Equities markets were volatile as they slogged their way through a myriad of earnings reports. New economic data that was available was lukewarm at best. Indexes followed here mixed with signs that they were running out of steam after the strong recovery from September lows. On the week, indexes rose anywhere from 0.7 percent (Singapore Straits Times) to 3.4 percent (Nasdaq). Seven indexes fell anywhere from 1.1 percent (Mexican Bolsa) to 4 percent (Nikkei). The Australian all ordinaries index was unchanged on the week.

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