Public Monetary Reform By Means of Securitization

ABSTRACT

After nearly being shelved by the postal service privatization plan and the issue of FILP Institution Bonds by special corporations, Prime minister Koizumi has once again taken up the matter of public indirect financing reform. This reform, which will include the disbandment or privatization of special corporations, is expected to give more force to market mechanisms. Meanwhile, such movements toward reform have shaken the optimistic ratings of the FILP Institution Bond issues; these bonds began the fiscal year as high as government bonds, on the assumption of the government's implicit guarantee.

Why should public financing be reformed? The aggrandizement of government/public bodies in economy and finance will inevitably lead to the accumulation of inefficiencies, the effects of which will not justify the costs. Even after the collapse of the bubble economy, Japan has been adhering tenaciously to Keynesian fiscal stimulus measures, measures that the United States and Europe have abandoned long ago. A prolonged dependency on large-scale fiscal policies that utilize channels of fiscal investment and loan and which disregard economic vitality (e.g. cost-effectiveness) is responsible for the accumulated inefficiencies. There are deep-seated suspicions that a considerable portion of fiscal loans-which are supposed to be repaid without fail, just as any other loan-has already become bad loans at a greater rate than those by private financial institutions. Market mechanisms must be introduced to public indirect financing as soon as possible in order to prevent further inefficiencies.

This raises a question, however: Is it true that no fundraising measures will be able to make market mechanisms work without the radical overhaul of special corporations? In fact, there is at least one possible measure-securitization with government-affiliated financial institutions' loan assets as collateral. More specifically, mortgage-backed securities (MBS) and asset-backed securities (ABS) with housing loans and small business loans held by the government Housing Loan Corporation and Japan Finance Corporation for Small Business would serve as this collateral in this case. FILP bodies for infrastructure building, such the Japan Highway Public Corporation, will also be able to securitize their assets related to individual projects with healthy cashflows as funds. What is important is that securitization and privatization are supplementary to each other; once securitization starts, asset disclosure will proceed according to business accounting standards, and the listing of funds-which has the same effect of privatization-will in turn form market prices. Special corporations will become far more transparent, and the road to their privatization will be paved.

Securitizing these products will improve the effectiveness of Japan's gigantic public indirect financing, and will turn a considerable part of it into direct financing. The securities market, in which undue weight has been given to government bonds, will be diversified and expanded.

Legal steps will be necessary to carry out these kinds of securitizations and to break-up special corporations. One possibility is the "Law Concerning the Securitization of Public Projects Assets" (provisional name). Since the transfer of an individual piece of national property is currently predicated on approval by the Diet, legislation will also be necessary that will enable the bulk transfers of pieces of national property for fund formation and fund-type securitization. Though there are high hurdles to overcome, including legislation processes, securitization will most certainly produce great effects.