WSJ: Japan passes moratorium on loan repayments

November 30, 2009

Interesting item from Alison Tudor:

Japan passed into law Monday a conditional moratorium on loan repayments by small businesses and home owners, a move that opponents say may lead to an increase in bad loans on the books of the country’s banks.

The bill, which has been in the works since the Democratic Party of Japan came to power in September, was passed by the upper house of Japan’s parliament on Monday, according to a spokesman at the Japanese banking regulator the Financial Services Agency.

The law is designed to encourage financial institutions to change the terms of loans when asked, though lenders aren’t required to do so. Opponents believe it still could put public pressure on banks to forgive payments, leading to an increase in nonperforming loans on bank balance sheets.

While Treasury is pressuring banks to make trial mods permanent, Japan wants to help out the little guy by encouraging banks to forgive loan repayments. Just another reminder that after two decades, Japan’s zombie economy is still struggling to extricate itself from an ’80s credit bubble.

“Forgiveness” is another word for writeoff. And debt writeoffs (accompanied by proper bank recapitalizations) are necessary to reboot the credit system. But “encouraging” creditors to do so won’t do much good. They have little incentive to forgive principal so long as macroeconomic policy rolls over debt perpetually.

There’s an uncomfortable truth to grapple with for those of us who didn’t get caught up in the housing/consumption bubble but instead built up savings. Depending on where those savings ended up, WE are the shareholders/creditors that by right should lose when the system gets recapped.

Nothing gets fixed till everyone takes a haircut.

Part of the appeal of gold, silver, raw land and other tangible assets is that it gets investors “out of the system” before that happens.


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Fuzzy logic!

Posted by Jo | Report as abusive

Waiting for Japan to blow up is stressful. It looms, and it is impossible for me to see the economic future beyond that event.

Posted by Dan Hess | Report as abusive