Economists in Japan say a persistent credit crunch, by blocking a recovery in corporate spending, would invite a prolonged double-dip or even triple-dip stagnation.
TOKYO -- Economists in Japan are warning that banks must become ready and willing to lend if the economy is to recover.
But there are no easy answers for the banks' double-edged problem of plunging stock prices and bad loans, said Yukihiko Shimada, economist at Wako Research Institute of Economics.
Heavy Load of Nonperformers
Analysts estimate that banks' bad loans, extended in the late 1980s, total as much as $235 billion to $390 billion.
The gloom over future earnings has prompted banks to limit loan growth, which has curbed the increase in Japan's money supply to June's record low of 0.9% from a year earlier.
Banks are under even more pressure to trim lending to meet international capital adequacy requirements by the end of March 1993.
Rising Demand for Loans
Economists say the slow money growth has not yet become a serious threat to the economy because corporations, stuck with high inventory levels, have been reluctant to borrow from banks for capital investment. But things will be different in the longer run.
"It would be a disaster if banks keep the current tight lending stance through next year, when corporate demand for funds is expected to show signs of recovery," Mr. Shimada said.
A persistent credit crunch would invite a prolonged double- or even triple-dip stagnation -as has been feared in the United States - by blocking a recovery in corporate spending, a major engine of growth.
"Unless the authorities take drastic measures to rescue the banking system, the economy won't regain its firm footing," said Yoichi Tazawa, an economist at Nomura Research Institute.
The Bank of Japan's options include further cuts in the discount rate and emergency loans to banks.
Bank of Japan Governor Yasushi Mieno has made it clear the central bank will do nothing to support bank profits, saying the only solution is for each institution to make its own efforts.
"Mr. Mieno would never admit the existing risks in the banking system, because this might trigger a panic," one analyst at a Japanese brokerage firm said.
"But the BOJ must make the banks regain confidence and make more loans to corporations," the analyst said.
Direction of Discount Rate
Many analysts believe that the Bank of Japan's cut in the discount rate to 3.25%, from 3.75% on July 27, was designed to bail out ailing banks rather than to support the domestic economy.
The rate cut has prompted sudden declines in short-term money market rates, making it cheaper for banks to raise funds.
Coupled with slow, small declines in banks' lending rates to their most creditworthy customers, the lower rates should widen profit margins. This could lead to an annual increase of an estimated $782 million in Japanese city banks' profits.
The most likely scenario is that the Bank of Japan will cut domestic rates again or make low-interest emergency loans to banks in trouble, both of which are temporary measures.
The Bank of Japan is not the only authority struggling to help banks.
The Ministry of International Trade and Industry has urged local governments to buy land from banks and financial institutions to ease their cash problems, which in turn would allow them to lend more to manufacturers. The ministry's rescue plan has provoked criticism from other agencies, which say it may not be fair to use public tax money to help bail out financial institutions.