Today, the credibility of Tokyo's guarantees are evaporating. But the process is not yet complete, as demonstrated by the LDP's hesitation over the recent nationalizing of the bankrupt Long-Term Credit Bank. Nevertheless, indications that the government cannot be counted on to save defunct borrowers and lenders have been spreading, especially with the financial failures of such former giants as Yamaichi Securities, Hokkaido Takushoku Bank and the Long-Term Credit Bank. Moreover, the impact of vanishing implicit guarantees is reinforced by gradual financial market deregulation, which is requiring that firms pay closer attention to how they use their capital. Corporate Japan, exposed to more intense market forces, finds itself with excess capital.
Firms are unlikely to invest as rapidly as in the old days when profitability mattered less.
Although new investment opportunities undoubtedly will arise, especially if encouraged by continued deregulation, the excess capital will have a restraining effect on future investment and, in turn, will lead to slower economic expansion. Estimations of future growth rates in Japan must account for the economic rather than book value of the capital stock. Without gains in efficiency and profitability, capital stock should be written down by approximately 40 percent to bring rates of return into line with American and European figures. This reduced value is what should be used in making projections about Japan's economy. Macroeconomic stimulus by itself is likely to be insufficient to put the economy back on a solid expansion course.