Comment on Deflation Discussions

Atsuo MIHARA (Representative, Office Mihara)

There seems to be increasing concern about Japan's deflation at home and abroad. I think this is a step in the right direction to identify causes and cures for Japan's economic illness. However, we need to be careful about a simplistic argument, often made by foreign observers, that banks' bad loans are the main cause for deflation and therefore the direct disposition of those bad loans should be the most effective anti-deflation policy, and a necessary reform measure anyway.

This argument is simply wrong, because bad loans are a result of the overall balance sheet problem that has been caused by the collapse of the stock and real estate markets in the last decade, and the problem cannot be solved by forcing banks to balance their books through disposition of their bad loans. Actually, banks would have to dispose of assets associated with their bad loans in respective asset markets, such as the real estate market. Without revitalizing the asset markets in general, we could not possibly solve the balance sheet problem and might even aggravate deflation by increasing the supply of various assets while decreasing the creditworthiness of borrows in the markets.

What we have to do now to reverse the current deflationary trend is adopt a market revitalization policy such as deregulation and tax incentives, focusing on the real asset markets, especially the stock and real estate markets, rather than wasting time and resources in banks' disposition of bad loans, which is counterproductive in time of deflation.