Published January 26, 2009

Tokyo to pump in billions into firms via the backdoor

Funds raised and provided through DBJ, JFC will bypass Japan's parliament

By ANTHONY ROWLEY
IN TOKYO

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IN AN effort to avert what is threatening to become an avalanche of corporate failures and job losses in Japan as exports collapse and recession tightens its grip on the economy, the government is planning to pump billions of dollars of funds into non-financial companies via a backdoor route, Japanese media reported over the weekend.

In dire straits: Flagship Japanese companies, including international electronics giants Sony and Panasonic, are making losses and declaring major redundancies

This would help it to bypass Japan's parliament, where fiscal stimulus plans are held up by political deadlock, and provide, in effect 'off budget' aid to the corporate sector, analysts said.

The need for action is seen as urgent. As flagship Japanese companies, including motor industry leaders Toyota, Honda and Nissan as well as international electronics giants Sony and Panasonic, make losses and declare major redundancies, the fear is that tens of thousands of supplier firms that are the backbone of Japanese industry could fail.

Collectively, these firms account for more than three quarters of manufacturing output and of employment in Japan, and their failure could have a devastating impact on the national economy while sending the current unemployment rate of around 4 per cent soaring to perhaps double-digit levels, analysts say.

Nissan and others have appealed for an official lifeline to be thrown to Japan's myriad of small and medium enterprises (SMEs) at a time when they cannot get bank financing, even though short term interest rates in Japan are at virtually zero.

The Bank of Japan responded last week with a three trillion yen (S$50.8 billion) plan to make 'outright' purchases of commercial paper from the corporate sector, and is studying more radical plans to buy corporate bonds of up to one year maturity and perhaps beyond.

But even this is unlikely to prevent a tide of corporate failures, analysts say. 'The speed of decline in exports and industrial production is more than twice as fast as anything on record,' commented chief economist Richard Jerram at Macquarie Securities in Tokyo.

'Inevitably, this is flowing into the domestic economy, as manufacturing firms cut employment, capital spending and other costs,' he added.

In an effort to turn the situation round, Prime Minister Taro Aso's government will set aside several hundred billion yen in the current fiscal year to fund a rescue of manufacturing and other non-financial firms, the Nihon Keizai Shimbun and Kyodo News Service reported. The capital injections would be in return for preferred shares in the firms, they said.

The Nikkei said that the Development Bank of Japan (DBJ) would screen firms seeking funds and provide capital infusions, while the Japan Finance Corporation (JFC) would raise funds via loans from the government or from the market with state-backed guarantees, the reports said.

'Under present circumstances where fiscal packages have been all delayed and interest rates in Japan are already so low, the actions proposed seem to me very sensible,' commented the former head of the DBJ and one-time vice-governor for international relations at the Bank of Japan Shujuro Ogata yesterday.

'The current financial problem in Japan is more of a problem of the lack of confidence in financial markets between lenders and borrowers rather than the level of interest rates,' he added.

The plan to use the DBJ and the JFC to channel funds into the corporate sector would bypass both the main balance sheets of the Japanese government and the banking system, as both institutions have the ability to tap capital markets using their strong credit ratings. It could also mean that funding could be scaled up according to need.