| stratfor.com
Summary
The Bank of Japan repeatedly has failed in its attempts to inject cash into
the banking system during 2005. That is not the only thing that has failed.
Analysis
The Bank of Japan (BoJ), the Japanese central bank, proposed to the country's
banks Feb. 3 that it purchase some 600 billion yen ($5.8 billion) of the
commercial paper they hold. The BoJ theorizes that paying Japan's banks cash
for enough items, such as government securities, discount bills and
commercial paper, should provide the banks with additional cash that they can
use to make low-interest loans to clients. Cheaper, more plentiful loans make
expansion easier for firms. Increased expansion on the part of firms ought to
yield more growth, which -- in theory -- should end the past 15 years of
Japanese economic malaise.
Less than 45 percent of the BoJ's offer was filled.
BoJ Gov. Toshihiko Fukui said that such failed efforts to inject cash are a
"good thing" since they indicate there is sufficient cash in the system.
According to his logic, failures to inject more cash represent mere
"technical problems." They are not.
Japan's banks do not need more cash. Interest rates in Japan already are at 0
percent. Zero-percent rates in effect allow banks to literally borrow cash
from the central bank for nothing. That makes any other BoJ actions to
increase banks' cash holdings -- such as calls for commercial paper --
pointless. The failed Feb. 3 commercial paper purchase was the 20th
unsuccessful BoJ attempt at buying bank assets to give them more cash since
New Year's.
The financial sector's problem is not a lack of cash -- BoJ policies ensure
they are drowning in the stuff -- but lack of will. In Japan, the development
model is one in which credit is provided at an artificially cheap rate to
ensure maximum growth and employment, profitability -- and even loan
repayment -- be damned. After all, cheap money means one can simply take out
new loans to cover old loans.
Most Japanese banks, therefore, have their portfolios concentrated in the
same handful of large clients that they were founded to serve. Terrified that
new loans to new clients could potentially make their balance sheets worse
than they already are, the banks largely refuse to lend to non-core clients,
including Japan's ever-stunted small and medium-business sector. This allows
Japan's zombie-esque superfirms to continue lumbering forward while smaller,
potentially more dynamic firms starve in the shadows because they cannot
raise capital for expansion, upgrades and sometimes even payroll.
The BoJ accordingly faces a complex problem. It no longer can keep pushing
the banks to take on more cash; they just do not want it. Continually
offering unwanted cash would be to forge ahead with failed offering after
failed offering, thus spotlighting the BoJ's inability to combat Japan's
endemic economic problems several times a week. On the other hand, if the BoJ
declares success and slows its cash-pushing efforts, the markets would
correctly recognize a de facto tightening of monetary policy, the first step
on the road to higher interest rates; that is, rates above zero.
Any increase in interest rates -- or even the threat of an increase -- would
disrupt the entire low-cost credit system that has been keeping much of Japan
on life support the past 15 years.
Such an increase is something that already is high on the public mind. Fukui
stated Jan. 28 that the 1993-2003 BoJ policy of low interest rates has cost
Japanese depositors some 154 trillion yen ($1.5 trillion) in lost interest.
Putting a specific yen amount on what government mismanagement has cost the
citizenry might not represent the smoothest move, but the BoJ has never
established itself as an overachiever at monetary guidance, much less public
relations.
Japan's entire social contract is based upon lifetime employment and a
sustained quality of life. The slow-motion breakdown of the Japanese
corporate world already has exposed the danger to lifetime employment, while
Fukui's verbal slip up has indicated that quality of life could be much
better. Thus, the BoJ remains trapped between a policy that does not work and
one that would shatter Japan's economic backbone outright.
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