The ruling Liberal Democratic Party has compiled a recommendation for extending more than 10 trillion yen ($93 billion) in public support for businesses that are struggling under the COVID-19 crisis.
The proposed measures include the bold step of capital injection on top of making low-interest loans available.
If the coronavirus crisis were to last long, that could put even major businesses, which have relative financial strength, under difficulties due to a shortage of capital. The government should study the proposals and consider implementing them in safeguarding against a possible financial emergency.
Major overseas airlines have fallen into financial crises. In Japan, too, a wave of coronavirus-induced bankruptcies has hit big businesses, as major apparel maker Renown Inc. has requested bankruptcy protection under the Civil Rehabilitation Law.
Many major companies have abundant cash on hand thanks to the prolonged business boom of recent years. Government officials believe leading businesses are unlikely to face financial problems in the near future. That said, some could find themselves cash-strapped if their deficits were to continue ballooning.
The LDP draft proposes, for starters, setting aside a new quota of more than 10 trillion yen in public support measures for businesses, including the provision of subordinated loans and the underwriting of preferred stocks by the Development Bank of Japan and Japan Investment Corp., both existing entities.
It also calls for considering the creation of a new capital injection system worth several tens of trillions of yen.
In a capitalist economy, private businesses should basically be competing freely and on their own.
That said, potential failures of big businesses due to a prolonged coronavirus crisis could induce a chain of bankruptcies among small and midsize enterprises, with which they have business connections, causing a loss of jobs and infrastructure.
Such a development could also further aggravate the vicious habit of Japanese companies–shunning aggressive investment and wage hikes for fear of taking on risks–which caused the drawn-out economic doldrums of the Heisei Era (1989-2019).
It is necessary for the government to have a certain mechanism of public support up its sleeve.
That does not mean, however, that businesses can be bailed out without limit.
Following the global financial collapse of 2008, Japan Airlines Corp. (today’s Japan Airlines Co.) and major chipmaker Elpida Memory Inc. received public support, but they both failed in the end, costing taxpayers more than 70 billion yen in total
Putting off a problem at hand only results in having to pay a higher price later.
Eligibility for the support measures should be limited to companies that have prospects of seeing a rebound in profitability once the COVID-19 crisis is over.
The public’s behavior will no longer remain the same. Not all businesses will be able to post a profit as long as they stick to their old business models.
Recipients of the support should be required to take drastic business rehabilitation measures, including business realignment, as the need arises. In advance of providing support, the government should fully explain what the support is aimed at and how it plans to collect the funds injected.
The LDP draft for support measures is lacking in these and other limiting mechanisms, which should be quickly worked out.
A shift of personnel and funds from low-productivity companies to high-productivity ones during a recession serves, in a sense, as a driving force for subsequent economic growth.
While it remains a basic premise that measures should be taken to safeguard the livelihoods of workers, excessive government protection of businesses could not only induce moral hazard among their executives but also produce the side effects of inhibiting future growth.