In our view, there are a few major flaws in the plan. Second, the program appears to be largely voluntary, at least at this point. Third, strict conditions apply for use of the funds. In Japanese parlance, this is widely interpreted to mean that management should resign to accept responsibility for the bank s troubles. Thus, by valuing equity holdings at artificially high book values, banks can argue that they are technically solvent and therefore do not need to take the government s funds with their onerous conditions.
Evidence is widespread that a credit crunch is underway in Japan.
As shown below, Japanese bank lending has run off in recent months, and in September stood nearly 3 percent below its year-ago level. The tightness of credit has led to a sharp rise in the number of bankruptcies, up nearly 19 percent in September from the year-ago level. Ironically, Japanese credit conditions may tighten further due to the recent banking legislation. The Financial Supervisory Agency, the government s financial watchdog, is conducting thorough examinations of all Japanese banks. In order to shore up their balance sheets even further and avoid the necessity of accepting the government s funds, banks may call loans of dubious quality rather than extending them.