Japan's Bank Ills May Hit Depositors

Government Adviser Recommends Letting Customers Take Some Losses

Hamada Acknowledges That Political Realities May not Allow Such an Approach

By Peter Landers, Staff Reporter

TOKYO -- The Japanese government's top economic policy adviser said depositors may have to bear some of the pain as the workout of bad loans at banks proceeds.

Koichi Hamada, president of the government's Economic, and Social Research Institute, also said he doesn't think it would case major international repercussions it the yen depreciates by about 10 yen to the dollar -- a move that he believes could result from the Bank of Japan's moves to ease monetary policy.

Currently the government guarantees all deposits at banks. However, after April 1, 2002 -- or April 1, 2003, in some cases -- deposits will be guaranteed only up to 10 million yen ($82,000). To date, government officials have been reluctant to state openly that some depositors may lose their money, for fear of provoking a run on weak banks.

Mr. Hamada, who is on leave from his position as a professor of economics at Yale University, said in an interview that the government should institute a strict program to ensure that banks fully account for their bad loans. If that happens, he said, "some banks may be close to bankruptcy."

Mr. Hamada said the government could simply inject capital into such banks to prop them up, but warned that this could invite "moral hazard" became it would encourage bank executives to believe that they could count on a bailout no matter how badly they perform.

"Some of the pain [that] banks have should be borne by depositors," Mr. Hamada. said. "For the future, cold turkey is best." However, he acknowledged that political realities might not allow such a radical approach noting, that "even local governments hold large amounts of deposits."

One compromise approach, Mr. Hamada said. would be to inject capital into the less severely hit banks while forcing depositors to take losses at the weakest banks. In that case, he said, the government should adopt transparent guidelines. "Unless you do it under well-understood rules, there is so much room for political maneuvering," he said.

Mr. Hamada stressed that his role in the Japanese government is to give leaders advice from the perspective of a professional academic economist, and noted that politicians don't always follow the views of academics.

Turning to monetary policy, Mr. Hamada repeated his oft-stated view that the Bank of Japan should try to pump up the money supply to combat deflation. He said a fairly modest fall in the yen resulting from easier money could bring about the Bank of Japan's goal of steady price rises in Japan. "If the yen goes down 10 yen or more . . . that kind of adjustment can be done. You don't have to have a radical adjustment of exchange rates," Mr. Hamada said.

He said it "wouldn't be so serious for Japan's external relations" if the yen falls to 130 to 140 yen per dollar, but acknowledged that Asian countries would object to a sharp fall in the yen.

Some observers say the recent price declines in Japan are a good thin because they bring Japan closer to world price levels. But Mr. Hamada, while welcoming a drop in the relative price of some imported goods vis-a-vis nontraded domestic services, said it is a mistake to encourage a drop in the overall price level. "The problem with general prices going down is that there are so many variables we cannot adjust downward," such as wages and debt payments, he said.

Asked how Japan can move into line with world price levels if not through a general price decline, Mr. Hamada noted that exchange rates are the main alternative approach. He didn't specify how far the yen should fall to bring Japanese prices into line with world price levels.