Japan's urgent action averts credit crisis

Published: June 10 2009 03:00 | Last updated: June 10 2009 03:00

Sweeping emergency measures adopted by the Japanese authorities have helped to avert a feared credit crisis, recent developments show.

Earlier this year Japan was gripped by the fear that the global financial meltdown would lead to domestic crisis, with bankruptcies surging and weakened share markets plunging further. Companies hoarded cash.

But that grim scenario failed to materialise and a measure of calm has re-turned to the capital markets. The monthly count of bankruptcies fell in May for the first time in a year.

"The tsunami has passed," said Tatsuya Terazawa, director of the economic and industrial policy division at the ministry of economy. "When the market was just going in one direction - down - we had no idea what would happen," he said. "[But] I think the sense of panic is gone."

Masaaki Shirakawa, governor of the Bank of Japan, said yesterday: "Hopefully, the worst is behind us." While revised gross domestic product figures for the January-March quarter, to be unveiled tomorrow, are expected to show the economy remained anaemic, in the past few months the stock market has enjoyed a rally that has even seasoned investors scratching their heads. The Nikkei average has soared 38 per cent in the three months since March 10, when it hit a 26-year low of 7,054.98.

Policymakers moved more quickly than usual to put measures in place and send the message that the government would do whatever it needed to support the market. The government set aside Y30,000bn in loan guarantees to encourage banks to lend to cash-strapped companies. Just over a third of that amount has been used since the end of October and demand has eased since March, indicating the programme is having its desired effect.

Meanwhile, the Bank of Japan stepped in to ease the pressure on banks and encouraged them to in-crease lending by buying commercial paper and other assets on their books.

At the nadir of the Nikkei average's dip, the Financial Services Agency asked banks to be flexible on loan covenants and to consider using syndicated loans as a way to provide funding while minimising risk.

The consensus is that these measures are having a positive effect, particularly in averting large-scale bankruptcies. But a concern is whether the measures will provide lasting relief or will turn out to be merely a stop gap solution.

"There is a possibility that the positive impact of the policy measures will run out of steam," said Nobuo Tomoda, senior manager in the research department of Tokyo Shoko Research, a credit research group.