Japan holds policy nerve as markets run scared

A vicious cycle of economic gloom and sliding share prices is intensifying pressure on Japan's policy makers to loosen both the tight fiscal policy which has dampened growth and the regulations which stifle new business.

However, for the moment, the authorities appear prone to stick with the basic steps already unveiled and pray that markets would eventually be persuaded that all would come well.

"We have decided to go ahead with fiscal reform and that needs to be maintained. At the same time, we are trying to take necessary measures to stabilise the economy and the financial system, Mr Okiharu Yasuoka, chairman of the ruling Liberal Democratic Party's financial stabilisation panel, (LDP) said.

"If you look closely (at the planned measures), they address each and every problem in the Japanese economy and as long as they are steadily and promptly implemented, I am sure a resolution of the problem can be seen," Mr Yasuoka told a rare news conference arranged for foreign media and analysts.

As Mr Yasuoka spoke, the Tokyo stock market concluded yet another day of steep declines fueled by fears that tightened bank lending spells more bankruptcies and that fresh corporate failures will in turn inflate banks' bad loan portfolios, increasing concern over financial system health.

The market's main barometer, the 225-share Nikkei average, fell as low as 14569.43 before closing down 3.37 per cent, (or 515.49 points) at 14,799.40 - its first close below the 15,000 level in more than two years.

"Falling share prices erase banks' latent profits (on shares) and though it there is still some time before the end of March (the fiscal year-end), it is a very tough situation," said Mr Takashi Kiuchi, chief economist at LTCB Research Institute. "Banks will respond by writing off bad loans and shrinking assets, which means a further credit crunch."

The continued share price plunge follows the Prime Minister, Mr Ryutaro Hashimoto's announcement of a two trillion yen income tax rebate, a surprise easing of his tight fiscal stance.

The rebates were included in an LDP package of proposals which officials said was worth about five trillion yen in all.

Government officials insist that while growth in the fiscal year to next March will be flat, the measures taken will both prevent future financial failures and help the economy grow by close to two per cent in 1998/99.

Outside experts, however, are far less sanguine. The International Monetary Fund said on Sunday that it had slashed its forecasts for Japan's economic growth in 1998 to 1.1 per cent from an October forecast of 2.1 per cent and warned that if the situation worsened it could hit other countries.

The Finance Minister, Mr Hiroshi Mitsuoka, meanwhile, met Japan's top banker to urge banks not to squeeze lending to healthy companies.