TOKYO: Japan's financial system is headed toward collapse and will require a government bailout of one trillion dollars, a US think tank said.
"Japan appears poised to follow the passive route of outright default," resident scholar John H. Makin wrote in the monthly Economic Outlook report put out by the American Enterprise Institute for Public Policy Research on Wednesday.
"The negative net worth of the Japanese banking system is somewhere above the yen-equivalent of one trillion dollars," Makin wrote. "When the banking system collapses... the Bank of Japan will need to inject at least one trillion into the banks to protect depositors from losses."
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He said such a procedure would need to be financed by the Japanese government, resulting in total public debt jumping by 15 percent, and causing a surge in liquidity that would cause Japan's currency and bonds to collapse.
| 'It amounts to beating harder a dead horse' |
"Japan's deflation and debt crisis now constitute systemic risk to the global economy," he wrote.
The report harshly criticises Japan for failing to stop rampant deflation, which increases the burden of paying off debts.
"Efforts by the Bank of Japan to boost economic activity and to reflate by increasing reserves in the banking system and cutting short-term interest rates virtually to zero amount to beating harder a dead horse," Makin wrote.
"The dead horse is the Japanese banking system, which by virtue of its insolvency is unable to act as a financial intermediary borrowing short from the central bank and lending to Japan's private sector."
Makin also criticised moves to postpone past next March the government's plan to cap its guarantee on bank deposits to 10 million yen (about R900 000), saying; "that step will only delay the outright collapse of the banking system." - Sapa-AFP
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