Japan has passed a law allowing moratoriums on loans owed by small businesses and homeowners.
The law encourages financial institutions to change the terms of loans when asked, yet lenders are not required to do so.
Critics say the move will put pressure on banks to forgive payments, pointing out the measure could lead to an increase in nonperforming loans on their balance sheets.
Smaller businesses (SMEs) account for about 30 percent of bank borrowings in the United States, compared to almost 70 percent in Japan, according to Bloomberg.
“Japanese banks are in a tougher position than U.S. banks because they are under pressure to allow SMEs to defer debt repayments at a time when capital adequacy regulations are becoming tighter,” says Masatoshi Moriyama, senior economist at Mitsubishi UFJ Securities.
“We believe this may be one reason why Japanese stocks lag behind other markets.”
Supporters say the bill will give struggling businesses room to grow and spend again.
The Japanese economy is still suffering from the global financial crisis, and its currency has strengthened against the lagging dollar, which hurts exports out of the country.
Core consumer prices have fallen for eight straight months, according to the Associated Press, which added that the yen has hit a 14-year high against the dollar.
Translation: deflation plus a strong currency leads to poor economic activity.
“In the midst of deflation, such a sharp rise in the yen is a very serious problem and could drag down the economy,” says Fujio Mitarai, chairman of Keidanren, Japan's largest business lobby, according to the Associated Press.
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