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. Last Updated: 07/27/2016

Koizumi Feels Heat Over Bank Reform

TOKYO -- Prime Minister Junichiro Koizumi came under pressure Monday to balance tough reforms with policies to limit the economic shock in a policy package due this week aimed at fixing banks and halting years of deflation.

Japan's financial system, beset by at least $415 billion in non-performing bank loans and a fragile stock market, was in severe shape, Bank of Japan Governor Masaru Hayami said in a speech, urging comprehensive action to resolve the problem.

Politicians and economists urged the government to match promises of harsh-sounding reforms with measures to the stimulate the economy, protect workers and prevent another recession.

But doubt was also growing over whether chief bank regulator Heizo Takenaka would take the tough stance feared only two weeks ago in financial markets when investors drove Tokyo's Nikkei share average to 19-year lows.

An opposition lawmaker told parliament that plunge had highlighted the need for a delicate approach.

"Tougher policies on bad loans and anti-deflationary steps must come as a package," Democratic Party secretary general Kansei Nakano said at a Lower House plenary session.

"But the government's anti-deflation steps are unclear and the prime minister should realize that that is the backdrop of the 'Takenaka shock' in the market," he added.

A task force led by Takenaka is expected to publish an interim report on plans to tackle banking problems on Tuesday, and the government is set to launch a more comprehensive policy package later in the week, incorporating ideas in that report.

Many analysts worry that the bank steps might be toned down in the face of political opposition while others worry that even if tough action is taken, the government will struggle to contain the rise in bankruptcies and unemployment that could follow.

"If we don't get a truly coherent policy package -- if we only have the bad-loan steps, even if they are not as radical as a lot of people had feared -- it could just feed worries about deflation rather than fight deflation," said Mamoru Yamazaki, chief economist at Barclays Capital (Japan).

Broker Salomon Smith Barney fired a warning shot, cutting Japanese

equities in its global portfolio to "underweight" from "overweight" and citing a lack of coherent government policy

as one reason. A key issue in the Takenaka report will be how the government may inject public funds into banks, whose capital is likely to be eroded by a more aggressive write-off of bad loans.

The Financial Services Agency estimates non-performing loans at around 52 trillion yen ($415 billion) -- a stubborn hangover from Japan's bubble economy of the late 1980s that has been worsened by years of stagnant growth and cozy ties between banks and hopeless borrowers.

Hidenao Nakagawa, a senior official with the ruling Liberal Democratic Party, said in a television talk show Sunday that the report was likely to come out Tuesday and the government's policy package Friday.

Comments by politicians and government officials in recent weeks suggest that employment measures and a safety net for small businesses will be a core component of the economic package.

Japan's unemployment rate has been hovering just below a record 5.5 percent for months, and job insecurity and sliding wages have been a major reason behind sluggish consumption, which accounts for more than half of Japan's economy.

On Monday, Koizumi defied calls for a quick shot of deficit spending to bolster growth, saying he had no plans to submit a bill for an extra budget in the current parliament session.

"The government is planning a comprehensive economic policy package toward the end of the month to overcome deflation and attain sustained

economic growth that is led by private-sector demand," Koizumi told the Lower House.

"But we are not considering a bill for an extra budget in the current parliament session for those policy steps."

The latest government effort to tackle non-performing loans was spurred by BOJ Governor Hayami after the BOJ announced last month an unprecedented plan to buy stocks directly from banks. Hayami said Monday the financial system was still vulnerable.

"From the standpoint of the financial system, the nation's nonperforming loan problem is, in relation to financial institutions' strength and profitability, facing a more severe situation than ever," Hayami said.

"To resolve the issue, comprehensive steps that appropriately assess non-performing loans, promote quick disposals and help improve profitability at firms and financial institutions are indispensable."