It is generally agreed that the banking system is malfunctioning, and the amount of credit outstanding is in steady decline.

Is Japan's economy in a mess because its banks are so weak they cannot lend? Or are the banks unable to lend because the economy is in such a poor state there is no demand for credit? This is probably the most impor­tant line dividing the two main schools of thought on what is wrong with Japan — and what needs to be done to get its economy growing again.

On one side are those economists who argue that bank credit is falling because the banks — which have massive bad debts and weak capital struc­tures — cannot support any new lending. On the other, those who argue that it is impossible to find creditworthy borrowers since the corporate sector already has too much debt, the economy is shrinking and prices are falling. In any case, they say, bank lending will inevitably decline as big companies make more active use of capital markets.

No one disputes that the banking system is malfunctioning, and the amo­unt of credit outstanding is in steady decline. Tales abound of banks tur­ning away depositors because they do not know what to do with the mo­ney — even of banks placing deposits with competitors and having to take them back after being found out.

The issue is one of cause and effect. Not surprisingly, most businessmen believe there is a supply of credit problem, and most bankers believe there is a demand for credit problem. "There is no demand for loans," says Toru Hashimoto, retiring chairman of Mizuho Holdings. There is some truth in both arguments. Japan's banks are preoccupied with their bad debts, which threaten their survival. Estimates of the total amount of loans which will eventually have to be recognized as bad range from ¥ 70,000 bn to more than ¥ 200,000 bn.

In many cases, the total loss after collateral would wipe out all or most of the banks' capital. No matter how freely deposits are available, banks need capital to make loans, particularly riskier ones. But government bonds are risk-free assets for regulatory purposes (in spite of the substantial mar­ket risk).

So money pours into Japanese government bonds. As a result, even tho­ugh Japan's government is under attack from the ratings agencies, 10-year JGBs yield only 1.35 per cent. Highly rated companies — particularly tho­se able to choose between bank loans and raising finance through bonds or commercial paper — also enjoy easy access to credit.

"The banking sector is obviously a matter of concern for all of us. But we, as a company, have no problems at all obtaining finance," says Taizo Nishimuro, chairman of Toshiba.

At the high end of the credit spectrum there is no credit problem at all. The problem begins lower down, with higher risk borrowers. Japan does not lack credit per se — it lacks a properly functioning credit yield curve. The banks' lack of capital is a much bigger problem here — but other fac­tors are clearly at work, too.

Analysis of the corporate sector shows growing polarization in credit quality between those companies that have access to loans but for the most part do not need them, and those that do not have access, but do.

This is only to be expected in an economy suffering from negative growth and price deflation. Even without capital constraints, the banks would naturally reduce their overall lending, and take part in a "flight to quality." Moreover, most big companies outside the top credit bracket al­ready have too much debt — a legacy of the bubble years, when any com­pany with tangible assets, such as land, could obtain cheap credit.

Such companies may want new loans — and may even need them to stay alive — but until their overall debt burden is reduced it would be impru­dent for the banks to lend to them. Indeed, many companies are engaged in a desperate effort to cut debt, at least in nominal terms.

This would not change even if the banks had plenty of capital. And this helps to explain why new banks and foreign lenders have not rushed in to meet unfulfilled demand for loans from creditworthy companies. There isn't any; not in the conventional business loan market anyway. But there is unsatisfied demand in the small-to medium-sized business sector, and for consumer finance.

Interest rates on consumer loans start at about 15 per cent. This could reflect risk — but the rapid growth and sustained profitability of consumer finance companies, such as Takefuji, and the entry of foreign lenders, such as GE Capital, suggest there is a lack of supply.

The same story may be true for the small- and medium-sized corporate sector. Although these companies are effected by the decline in the eco­nomy, and some by structural changes, most at least were not overlevera-ged in the first place.

"When we were a small company, it was difficult to get loans," says Ta-dashi Yanai, chief executive of Fast Retailing, the parent of retail chain Uniqlo. "Now, there is no problem at all." But even here, it is not clear that lack of capital is the main problem. Poor risk assessment skills — and a tradition of lending only against collateral such as land — is at least as big an impediment.

Outside skills, probably foreign, may be needed. So, while there is a supply of credit problem to some sectors, particularly small- and medi­um-sized enterprises, and a stronger banking sector would certainly be ab­le to make more loans to risky borrowers, this is not by any means the only reason why bank lending is falling.

And this suggests that fixing the banks may not, in itself, solve Japan's economic woes. Other radical action — perhaps including massive mone­tary or fiscal stimulus, or government funding for write-offs of excessive corporate debts — might be necessary to get Japan working again.

H.2. Answer the following questions.

1. What are two points of view on what is wrong with Japan?

2. Why is there some truth in the arguments of businessmen and bankers?

3. What does analysis of the corporate sector show?

1. Why have new banks and foreign lenders not rushed in to meet un­fulfilled demand for loans from creditworthy companies?

4. What is the main problem according to the CEO of Fast Retailing?

5. How is it possible to get Japan working again?

H.3. Decide whether these statements are True (T) or False (F).

1. Bank lending will decline as big companies use more actively money markets.

2. For regulatory purposes Japanese banks could use government bonds without any risk.

3. The banks' lack of capital is a much bigger problem at the high end of the credit spectrum.

4. If there were no capital constraints the banks would reduce their ove­rall lending.

5. The rapid growth and sustained profitability of consumer finance com­panies reflect risk.

6. Bank lending is decreasing because banking sector is not able to make more loans to risky borrowers.

1. to malfunction;

2. bad debt;

3. to abound;

1. collateral;

4. tangible asset;

5. imprudent;

2. overleveraged;

6. impediment.

H.4. Match up the words and definitions and translate them into Rus­sian:

1. a debt that will probably never be paid, and is therefore worthless to the person or company that is owed the money;

2. assets promised by a borrower to a lender if the borrower cannot repay a loan;

3. unwise and thoughtless;

4. a fact or event that makes action difficult or impossible;

5. to function faultily;

6. if a company has borrowed too much money and cannot make payments on the debt;

7. an asset that is physical and can be valued easily, rather than an intangible asset that is difficult to value;

h) to exist in large numbers or great quantity.

H.5. Read the article once more, find the sentences containing ing-forms and translate them into Russian.

H.6. Make up the outline of the article and then render it.

L Reading the Russian newspaper