The government, panicked by the “major bankruptcies this week” that have continued since October of last year, decided on a tax cut with no policy to speak of. By without policy, I mean the flip-flop of implementing, in April last year, a large tax increase of ¥10 trillion and then cutting taxes before even 1 year had passed. Still, let us give it credit for admitting its mistake. The problem is that it is not only too little, too late, but also somewhat off the mark.
The government presumably intends to overcome this crisis through measures such as the current tax cut, bringing forward spending from the next fiscal year’s budget, and a large supplementary budget for economic stimulus. The construction industry may catch its breath, but that would be temporary, and for financial institutions it would be far from a fundamental solution.
Yamaichi Securities, one of the 4 major securities firms, collapsed while saying that it was not insolvent. If it truly had not been insolvent, it would have been natural for it to survive through some capital injection or similar measure, given its brand and business assets. Yet it had to collapse because almost nobody believed that it was not insolvent. That is hardly surprising, given that it had concealed off-balance-sheet liabilities of more than 2,000 for years. The real problem lies here: everyone has become unable to trust financial institutions, whose business is supposed to be selling trust. And if even financial institutions cannot be trusted, other industries are worse still. The current recession is a recession caused by credit contraction. A tax cut of ¥2 trillion or conventional public investment in this condition is like giving only an antipyretic to a patient with pneumonia: it is nothing more than symptomatic treatment. It does not cure the illness; it only eases the immediate pain, while the condition will worsen further.
The right prescription for the present situation is to restore the lost trust. To do that, I think the best course would be to use the funding for a tax cut of ¥2 trillion to establish a Financial Inspection Agency. Of course, its inspectors would not be Ministry of Finance officials. It would recruit certified public accountants, analysts, and others extensively from the private sector. With an annual budget of ¥2 trillion, it could employ about 20,000 people. It should first deploy them for thorough inspections of Bank of Tokyo-Mitsubishi among banks and Nomura Securities among securities firms. With that many people, the inspections would be finished before long. Of course, problems that had not surfaced before would come to light, but it is better to drain the pus. In this way, starting with the top companies, they could be brought one by one to a cleared state. Companies in that state would no longer suffer poor business performance caused by a loss of trust, though whether their performance recovers would of course depend on management.
What the government should do now is neither adjust the number of ministries nor cut taxes. It is to provide credit, in the essential sense, to Japanese companies that have become unable to restore trust autonomously.