Countermeasures for Deflation (provisional English translation)

March 18, 2002

Select Commission on Policies for Deflation
Liberal Democratic Party of Japan
February 26, 2002

  The state of our nation's economy has worsened considerably and is now in danger of falling into a deflationary spiral. Finding ways to avoid this spiral and to reinvigorate the economy is a matter of the highest importance for our country. For this reason and also to support the efforts of Prime Minister Koizumi to carry out reform, many are demanding that measures to respond to deflation be implemented as quickly as possible.
  Implementing these measures requires first that the problem of disposing of non-performing loans be resolved. This in turn requires 1) special inspections of major banks and the prompt disclosure of the actual state of their non-performing loans, 2) the clarification of policies for loan disposal and the stabilization of the financial system, and 3) the restoration of people's confidence in the financial system. We must never again allow a financial crisis to occur and are expressing our firm determination both at home and abroad to employ all available means to ensure that it does not. Some examples of this are 1) revising appropriate laws and facilitating the concentrated purchasing of non-performing loans by the Resolution and Collection Corporation (RCC), 2) calling for greater flexibility to be introduced into the Bank of Japan's finance policies, 3) expanding the operations of the Bank Equity Purchasing Corporation and discussing the simplification of and relief measures for the securities taxation system in order to revitalize the stock market, and 4) ensuring the integrity of financing for small and medium-sized enterprises.
  Along with the disposal of non-performing loans, the stimulation of demand and the revitalization of industry through private sector dynamism must be promoted. To reorganize structurally-depressed sectors of the economy and make industries located within in them internationally competitive, the ruling parties must unite and tackle these problems together.
  With the goal in mind of revitalizing the national economy, we will vigorously promote both urban renewal projects and those involving private finance initiative (PFI) measures. In addition, we will work to increase liquidity and vitality in the real estate market, spur acquisition of housing, and promote investment.
  We will also continue to honor the 30 trillion yen framework for issues of national bonds. Furthermore, in order to create truly effective demand, we will discuss the use of public finance measures and the Fiscal Investment and Loan Program in line with future developments.
  Policies must be fully mobilized to counter deflation. We call on the government and Prime Minister Koizumi to demonstrate leadership and act in tandem with the ruling parties to vigorously promote anti-deflationary measures.

(1)	Promoting the Disposal of Non-Performing Loans and Stabilizing the Financial System
1.	Promoting the RCC's purchases of non-performing loans

	(1)	In accordance with legal revisions made last year, the RCC will carry out purchases at actual prices determined through consideration of the balance in the mid-term of expenditures and income of business operations as a whole. In the event that the Financial Revitalization Account¹ runs a deficit, appropriate budgetary measures will be put into place. Taking this into consideration, the RCC will make concentrated purchases of non-performing loans without undue trepidation concerning the occurrence of deficits.
	(2)	In order for it to engage in operations such as the purchasing of loans and corporate revitalization in an active manner, the RCC will work to make fundamental improvements to its organizational structure and human resources. To accomplish this, financial institutions will be asked to provide it with personnel possessing appropriate skills and experience.
	(3)	Although financial institutions will conduct final settlements in a variety of ways, a target of more than 2 trillion yen (principal base) by March, 2003 using the assets-in-trust method and corporate restructuring funds has been established for disposals of non-performing loans through the Deposit Insurance Corporation and the RCC.
	(4)	Corporate restructuring funds will be expanded.

2.	Prompt disclosure of the findings of special inspections of major banks The findings of special inspections of major banks will be announced promptly so that anxieties concerning non-performing loans are eliminated and the public's faith restored.

3.	Securing financial institution cash flows In the event that unfounded rumors have created considerable cash flow difficulties for financial institutions, measures to restore confidence, including efforts by the Bank of Japan to provide liquidity, will be taken.

Recapitalization of financial institutions
In the event that serious concerns exist that an extremely serious impediment to the restoration of confidence in the nation or a region of the nation is likely to develop, it is possible through a meeting of the Financial Crisis Response Committee² (established according to Article 102 of the Deposit Insurance Law³ and headed by the Prime Minister as Chairperson) to carry out recapitalizations by application. Accordingly, resolute action should be taken to respond without hesitation to a situation in which there is reason to believe that a financial crisis may be precipitated by the accumulation of new non-performing loans produced as a result of, among other things, an increase in deflation or the results of special inspections.

5.	Response to the Payoff

	(1)	The fact that it is possible by invoking measures contained in Article 102, Section 1, Item 2 of the Deposit Insurance Law mentioned above (authorization by the Financial Crisis Response Committee) to protect the entire amount of deposits, including those exceeding 10 million yen, that have been placed in financial institutions which subsequently fail will be clearly articulated.
	(2)	Serious, far-ranging discussions will take place on actions to be taken following the introduction on April 1, 2003 of the Payoff system concerning liquid deposits.
	(3)	Efforts will be made to ensure proper consideration of the effects that the official deposits of local public bodies have on their finances.

6.	The Bank of Japan's finance policies

	(1)	Introduction of Price Level Targeting Based upon consumer price index averages during a fixed period, adjustments will be made to financial markets with a target of raising consumer prices by 1-2% per year.
	(2)	Efforts will be made to improve the flexibility of the management and buying and selling of government bonds, foreign bonds, and securities.
	(3)	Appropriate revisions to laws will be made so that the above actions can be carried out.

(2)	Measures to Revitalize the Stock Market and the Economy
1.	Improving and strengthening the Bank Equity Purchasing Corporation (BEPC)

	(1)	Making Bank Stocks Eligible for Purchases In contrast to the fact that a Securities Purchasing Corporation⁴ exists to eliminate the cross-holding of shares by corporate entities, a similar arrangement does not exist for bank stocks. In line with the goal to promote the smoother elimination of cross-held shares, bank shares will be made eligible for purchases.
	(2)	Making Stocks Held by Insurance Companies Eligible for Purchases With the objective of further improving the functioning of the BEPC as a safety net and ensuring the stability of the financial system, stocks held by insurance companies will also be made eligible for purchases.

2.	Expanding the use of the operating funds for postal savings, postal life insurance funds, and pension funds (including purchases of exchange traded funds (ETF))

3.	Reassessing the securities taxation system The simplification of the securities taxation system and tax reductions on capital gains for stocks and capital gains for mutual funds will be discussed.

4.	Promoting industrial reorganization A mechanism designed to actively promote industrial reorganization and structural change in a period of intense reform will be promptly created by the ruling parties.

5.	Discussion of tax code revisions that contribute to the revitalization of the economy

	(1)	Exceptions for taxes related to housing acquisitions (such as the considerable expansion of exceptions for capital transfer (gift) taxes).
	(2)	Reduction of taxes on capital gains for real estate transfers, reductions of and exemptions for real estate registration and licensing taxes and real estate acquisition taxes.
	(3)	Expansion of the tax system for investment promotion and tax systems contributing to energy conservation and environmental protection measures such as low-emission vehicles.

Active promotion of private urban renewal projects and the Urban Renaissance Headquarters' Urban Renaissance Project
In order to erase the negative legacies of the 20th Century and support private sector efforts to create new cities for the 21st Century, the Special Measures for Urban Renewal Law will be passed and measures to provide financing for "special urban renewal districts" (that are exempted under this law from all currently existing urban plans) and urban planning recommendation systems and private sector projects that make use of private sector initiative and creativity will be taken promptly. Regional and local governments will be encouraged to make full use of such projects.

Use of PFI
Based upon revisions made to the PFI Law, the provision of infrastructure for public facilities through PFI will be actively promoted. Local public bodies will employ PFI to create necessary infrastructure for public facilities in a timely fashion. The national government as well will work actively to bring about swift and concrete implementation of PFI on projects such as Central Government Office Building No. 7, infrastructure for national universities, and public employee housing. Tax measures to promote these activities will be discussed.

8.	Appropriate discussion of currency and other economic relations with Asia

(3)

Policies for Small and Medium-Sized Enterprises

	1.	Financing and guarantees, in particular safety net loans and guarantees provided to small and medium-sized enterprises by government-affiliated financial institutions and credit guarantee associations will be expanded. In addition, the use of the System of Guaranteeing Financing through the Collateralization of Receivables⁵ will be actively promoted and a system for unsecured loans will be created for the Shoko Chukin Bank. Efforts will be made to make full use of the New Business Financing System.⁶
	2.	Long-term financing for operating capital provided to medium-sized enterprises by the Development Bank of Japan will be undertaken.
	3.	The repayment conditions for special financing guarantees currently used by credit guarantee associations for small and medium-sized enterprises will be eased.
	4.	A manual for finance inspections of small and medium-sized enterprises that reflect the actual circumstances of these enterprises will be produced.

(4)

Policies for Public Finance

In line with progress being made with the various measures outlined above, the use of public finance measures and the Fiscal Investment and Loan Program (FILP) will be discussed.

1 Known in Japanese as	-	金融再生勘定
2 Known in Japanese as	-	金融危機対応会議
3 Known in Japanese as	-	貯金保険法
4 Known in Japanese as	-	株式買取機構
5 Known in Japanese as	-	売掛債権担保融資保証制度
6 Known in Japanese as	-	新創業融資制度